Brazil and Mercosur - A key future economic opportunity for the UK

With signs of some political stability in Brazil following several years of turmoil in Brasilia, amid an economic recovery, there has been renewed focus on the trade possibilities of Latin America’s largest economy for the UK. With a GDP of almost £2.5 trillion, and a population of 207 million, and a rapidly expanding middle class the attractions are obvious . A trade agreement between the two most recent Summer Olympic hosts offers big benefits to both countries, for Brazil access to the UK agricultural market would be key, whereas UK companies are very interested in greater and deeper access to the Brazilian services and manufacturing market. Not all companies are able to undertake the investment Jaguar Land Rover did to gain greater access, opening a plant in Itatiaia, in South East Brazil, to serve as a South American base. So a trade deal would particularly help smaller British companies.

Any deal with Brazil would have to be in the form of a free trade agreement with Mercosur, a regional customs union and free trade area, founded in 1991, currently comprised of four full members: Argentina, Brazil, Paraguay and Uruguay, and Venezuela, currently suspended due to violations of democratic principles. Together the five countries have a GDP of £3.6 trillion and represent a market of 293 million people, so Brazil is by far the largest member.

The opportunities are significant for the UK and there is a real political willingness across the Atlantic for talks, with the Brazilian Foreign Minister stating last year that they would push for immediate trade talks with the UK in preference to the EU. A new less anti-British and more free market government was elected in Buenos Aires as well last year.

The UK has long seen the potential of Brazil, and we have been consistently among the top ten biggest investors in the country over the last decade, our goods and services exports there significantly expanded before Brazil's economic contraction in 2015-16. Besides JLR many other big UK companies operate in Brazil, such as Rolls Royce, Shell, BP, JCB, Rexam and Experian. In fact Shell is he largest foreign operator in the country. There are significant regulatory and logistical challenges in operating there, meaning most UK investment has come from large corporations. Any trade agreement should seek to overcome some of these potential non-tariff barriers and open up the Brazilian market to smaller UK players.

Sao Paulo

Current top UK exports areas are machinery, vehicles, pharmaceutical products, electrical goods and chemicals. The healthcare sector in particular offers big growth opportunities as standards and demand rise in Brazil, beyond just pharmaceuticals, there are openings in hospital management, healthcare systems, e-health and medical devices.

Oil and gas is an area with substantial UK investment already, but UK expertise is valuable in a raft of areas in the industry, from providing offshore equipment and services, to repair and maintenance and bringing the most challenging projects to fruition. Mining is another industrial sector with a similar need for UK knowledge and expert services.

Water and sanitation are another key market where the UK can make a significant impact, the government is committed to a major investment plan, as only just over 80% of the population currently have access to water supply, and only 39% have treated sewage.

So as all the above examples show opening up Brazil's public procurement market will be critical in any trade agreement for the UK, as well as removing unnecessary regulatory barriers designed to keep out foreign companies. That will not be easy to achieve, and will require very detailed negotiation, but the opportunities are significant if it can be agreed.

There are also growing tech markets the UK is well placed to move into, particularly in areas of big data and security, where our companies are already global leaders.

As I will discuss below, access for their agricultural produce is key for Brazil and the other Mercosur countries in any deal with the UK, but there are opportunities for the UK here in reducing tariff and non-tariff barriers. Brazil is very keen to increase yields and efficiency of its sector as wages and costs rise so UK agri-tech companies can gain a lot from greater access and ease of doing business, bringing precision agriculture, better machinery and research and development products to the Brazilian market. UK premium products and brands, particularly processed foods and alcohol, are gaining growing interest in the expanding middle class and would benefit from a reduced tariff regime. Sugar could also see real benefits for British companies. Iconic British brand Tate & Lyle are currently restricted by an EU two million tonne tariff free quota on sugar cane imported from Africa, the Caribbean and the Pacific, with everything outside of those regions faces a hefty quota. Brexit will mean that the UK will leave this system and a trade agreement with Mercosur will likely come with a substantial tariff free quota, making it much easier to source cheaper quality sugar.

brazil crop

The centrality of agriculture to Mercosur’s interest in a deal with the UK is undeniable. Brazil is the world’s largest exporter of sugar, coffee, orange juice and chicken, and one of the largest of beef and soya beans, and other Mercosur members have similarly huge agricultural interests. This is also an area where the UK has a competitive advantage over other potential trade partners. The EU and Mercosur have been in stalled infrequent talks regarding a free trade agreement since 1999. The EU does not want to open its agriculture market to the most efficient and effective agricultural superpower in the world. As recently as July, the EU Agriculture Commissioner stated that Mercosur should not expect much more access to the European market for both their sugarcane ethanol and beef, two of Brazil’s most competitive exports. In response to this, the Mercosur countries are unwilling open up their protected manufactured goods or services markets.

So this presents a golden opportunity for the UK to selectively offer agricultural access to Mercosur, in exchange for UK access to Mercosur’s manufacturing, financial services, construction and public procurement markets. Obviously this would present some challenges to the UK agricultural sector if not handled correctly, so needs careful negotiations on the tariffs and quotas for agricultural products.

Given the political willingness on both sides and the complimentary elements to a deal for the UK and Mercosur there is a real chance that this could be an early free trade agreement for a post-Brexit Britain. It is certainly one that is worth pursuing from an economic and strategic point of view.