Tag: production possibiliy frontier

The EU has recently signed two trade deals after many years of negotiations. The first is with Mercosur, the South American trading and economic co-operation organisation, currently consisting of Brazil, Argentina, Uruguay and Paraguay – a region of over 260m people. The second is with Vietnam, which should result in tariff reductions of 99% of traded goods. This is the first deal of its kind with a developing country in Asia. These deals follow a recent landmark deal with Japan.

At a time when protectionism is on the rise, with the USA involved in trade disputes with a number of countries, such as China and the EU, deals to cut tariffs and other trade restrictions are seen as a positive development by those arguing that freer trade results in a net gain to the participants. The law of comparative advantage suggests that trade allows countries to consume beyond their production possibility curves. What is more, the competition experienced through increased trade can lead to greater efficiency and product development.

It is estimated that the deal with Mercosur could result in a saving of some €4bn per annum in tariffs on EU exports.

But although there is a net economic gain from greater trade, some sectors will lose as consumers switch to cheaper imports. Thus the agricultural sector in many parts of the EU is worried about cheaper food imports from South America. What is more, increased trade could have detrimental environmental impacts. For example, greater imports of beef from Brazil into the EU could result in more Amazonian forest being cut down to graze cattle.

But provided environmental externalities are internalised within trade deals and provided economies are given time to adjust to changing demand patterns, such large-scale trade deals can be of significant benefit to the participants. In the case of the EU–Mercosur agreement, according to the EU Reporter article, it:

…upholds the highest standards of food safety and consumer protection, as well as the precautionary principle for food safety and environmental rules and contains specific commitments on labour rights and environmental protection, including the implementation of the Paris climate agreement and related enforcement rules.

The size of the EU market and its economic power puts it in a strong position to get the best trade deals for its member states. As EU Trade Commissioner, Cecilia Malmström stated:

Over the past few years the EU has consolidated its position as the global leader in open and sustainable trade. Agreements with 15 countries have entered into force since 2014, notably with Canada and Japan. This agreement adds four more countries to our impressive roster of trade allies.

Outside the EU, the UK will have less power to negotiate similar deals.

Articles

• EU and Mercosur agree huge trade deal after 20-year talks

BBC News (28/6/19)

• EU and Mercosur reach agreement on trade

EU Reporter (2/7/19)

• What’s in the historic EU-Mercosur free-trade deal? Euronews Answers

Euronews (1/7/19)

• Global Europe Has a Trade Message for Trump

Bloomberg, Therese Raphael (2/7/19)

• EU and South American bloc reach trade deal to cut tariffs

Financial Times, Jim Brunsden and Andres Schipani (28/6/19)

• The EU-Mercosur trade deal: Why this is the worst time to leave the EU

The New European, Paul Behrens (4/7/19)

• While the UK is squabbling, the EU is leading the way on trade

Irish Examiner (4/7/19)

• Vietnam, EU sign landmark free trade deal

Reuters, Khanh Vu and Phuong Nguyen (30/6/19)

Questions