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Cultural integration with free trade for the middle class

Updated: Mar 14



During the first week of December, Mercosur held its semiannual summit in Rio de Janeiro, “a cidade maravilhosa,” with the announcement that the free trade agreement with the European Union (EU) will not be signed this time either. 

By far, a legal paradise. Those who live in Rio are familiar with the zoom panoramic view of Christ the Redeemer towards Ipanema that captivates you from afar but awakens all your urban nightmares when you get close. Analogically in Mercosur, the more the aspirational beauty of a customs union is negotiated by resorting to the cultural affinity between its nations, the more its local and community regulatory inconsistencies become evident.

The law of Mercosur still does not accompany the fervent reality of the spontaneous social integration of its citizens and must focus on the circulation of small and medium-sized regional businesses because otherwise, intra-zone free trade will not materialize. As long as it is not defined by this intra-zone approach, its most important negotiations, such as the EU-Mercosur agreement and the Mercosur-Canada agreement, will suffer from stagnation.

Cultural affinity and after?  The cultural affinity between the EU, Canada and Mercosur has solid and historical roots. Canada is a country as old, agricultural and with natural resources as the Mercosur countries. Technologically comparable to Brazil and populated like Argentina, it attracts immigration from all the middle classes on the planet. In addition to reforming Nafta, today USCMA, with notable legal progress focused on SMEs and digital commerce, has ratified a novel agreement with the EU six years ago, the CETA (Canada-European Union Comprehensive Economic and Trade Agreement).

The approval of an international treaty depends on a complex coordination procedure between Canadian provinces. Alberta, for example, has enacted a legal device to veto federal initiatives that could affect its provincial economic interests.

It also maintains a broad and inclusive consultation system for communities and committed economic sectors. Respect for human rights and non-discrimination in the context of international trade also constitute essential legal pillars of any negotiation. And free trade agreements should assist Canadian SMEs.

No room for guesswork.  In 2019, when the proposal for the new text of the EU-Mercosur agreement was launched, France, Poland, Ireland and Belgium criticized the high quotas granted, while releasing those same products with CETA. They tolerated Canadian quotas and rejected Mercosur quotas. In short, Canadian SMEs ensure compliance with technical standards and those of Mercosur, it is not known. 

With Mercosur, the para-tariff discussion took place. Quality control and phytosanitary measures were essential to protect European standards. CETA, on the other hand, contains a dynamic coordination and information mechanism for companies and essential for SMEs. The ecological argument that in Mercosur, livestock farming is responsible for 80% of Amazon deforestation, led to a possible non-compliance with the European Green Deal. 

Doing business in Mercosur was systematically assimilated to first accessing the Brazilian market. Argentina closed its free trade aspirations when it began to apply withholdings to its exports and control imports, suffocating its SMEs with taxes. Paraguay created the most competitive tax system in the block. Uruguay began to propose to the bloc that bilateral negotiations would be faster and more effective. Bolivia ended up joining the bloc, perhaps even Chile and Peru will join the bloc with an exit to the Pacific.

Free establishment for SMEs. After 22 years of existence, Mercosur law has established some relevant protocols and agreements, although many of them are not in force. The national courts of justice hardly listen to the arguments of Community law. The Permanent Court of Mercosur (TPR) should receive powers to issue judicial advisory opinions at the direct request of businessmen and individuals.

The fluid cultural and economic exchange between member countries is dominated by SMEs. Mercosur citizens want to do business and circulate, along with their goods, capital and services within the bloc. It afflicts the right of integration that the free movement of people is not expressed among the freedoms of the Treaty of Asunción. Regarding free residence, there is nothing else today than a temporary residence for two years.

Much less exists a norm of free establishment. To recognize it in Mercosur, a business and corporate notion must be incorporated, which enables the opening of subsidiaries, the transfer of headquarters, transparent regional corporate control, the reciprocal recognition of liabilities and payment of expenses abroad, simplify the admission of legal personality, extend national treatment, among other tools. Freedom of establishment and free movement of workers constitute the legal cornerstone of economic integration.

With free establishment, Mercosur should transform and integrate energy resources, put its capital into circulation freely - including fintech -, and enhance the ubiquity of technology companies. If EU-Mercosur follows the CETA model, this integration depends on observing and investigating how SMEs integrate and how the middle class circulates regionally in Mercosur.

The CETA of SMEs and the middle class. Ireland, one of the countries opposed to the EU-Mercosur agreement, is one of the main beneficiaries of the CETA regime. During the negotiations, he questioned the progressiveness of its rules because it allows the movement of service providers and workers. The Irish Green Party called it a “Trojan horse” for large companies and today 90% of European and Canadian SMEs operate through CETA. Ireland is home to almost all Canadian subsidiaries operating in the EU and almost 700 Irish companies have been incorporated in Canada. Canada recognized 143 claims of origin for Irish products (including the famous whiskey) without affecting the competitiveness of the same Canadian products. The regime for the free provision of services completely opened finance, telecommunications, medicine and research for innovation. Created an accelerated framework for the recognition of professional diplomas.

Article 10 of CETA enables the temporary movement of company employees and managers and authorized more investment visas.

CETA's dispute settlement system was initially widely criticized. With the modernization of the “investor-country” legitimation, CETA enabled companies as opinion parties and claimants, instituting a rotating system for the appointment of the panel of arbitrators.

CETA is today known as a free trade agreement for the middle class. On April 30, 2019, the Court of Justice of the EU (CJEU) opined (#1/17) that CETA's novel dispute settlement system is compatible with European law. Mercosur should be legally modernized and allow the TPR to give its opinion on the dynamic application of community freedoms and resolve on the regional impact of free trade agreements.

Canada-Mercosur: six legal conditions. The 2018 bilateral understanding note establishes a study of the environmental and labor impact against discrimination of trade liberalization. According to Foreign Affairs Canada, the consultation with the Standing Committee on International Trade (SCIT) in December 2018 established six conditions for the agreement with Mercosur. On April 3, 2019, the Honorable Jim Carr, the now deceased Canadian Foreign Minister, took note of these conditions and approved them, explaining his negotiation strategy to Parliament. 

First , the Canadian companies that will have priority are software, lighting, fishing, canola, technology, automotive parts and agricultural equipment.

Second, the abusive use of non-tariff barriers requires Canada to demand that Mercosur establish enforceable rules to combat them. Licensing for foreign trade, exchange costs, protection of investments in agricultural biotechnology and intellectual property demand an active and efficient bilateral consultation system.

Third, caring for the competitiveness of Canadian companies requires the creation of a dispute resolution system to prevent unjustified subsidies. Likewise, Canada demands a permanent information system in Mercosur at the same level as the Canadian Business Network for companies that wish to access its market.

Fourth , Canada requires the inclusion of multicultural clauses that respect UNESCO's Convention for the Protection and Promotion of the Diversity of Cultural Expressions.

Fifth, Canada will examine the protection of its companies' investments, recognizing the right to take measures in the public interest.

Sixth, the internationalization and information of SMEs must operate including them to ensure that their trade and investment opportunities flow. Mercosur must accept the chapters on labor admission and provision of services, environmental protection and technological access, detailing the relationship between trade and gender, trade and indigenous nations. For the environment, the agreement must create a regime that guarantees robust, enforceable and ambitious governance within the framework of free international trade without being derogatory to principles.

Integration depends on free trade of SMEs. Without great legal detail, point 16 of the text of the EU-Mercosur agreement proposed in Brussels on July 1, 2019, seeks to institute an exchange of information on market access for SMEs, cataloging only tariff codes and rates, rules of origin and other somewhat more specific import requirements. EU-Mercosur must level it with the CETA system because SMEs today represent the lungs of international exchange and integration.

The EU-Canada agreement maintains a joint committee that actively determines the specific stages that SMEs need to follow in Europe and Canada, within the framework of a work plan that publicly reports its results.

Mercosur has to demonstrate to the world that it has the legal instruments to guarantee the internal circulation of its SMEs. It is a serious shortcoming that it does not offer efficient technical information structures, nor that it does not exhaustively explore the regional integration of its SMEs. Since the old resolution 59 of the Common Market Group of 1998, Mercosur for SMEs has not been modernized.

Note: published in Spanish by Legal Today, Aranzadi Dec 19, 2023

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