Will regionalism survive multilateralism? The EU-MERCOSUR example

Twelve years after the agreement on the framework of negotiations, eight after the beginning of the market access talks, the EU and the MERCOSUR negotiations have not managed to reach significant achievements. Several reasons explain this situation. First, progress in bilateral negotiation are hold on the conclusion of the Doha Round. Second, Agriculture is a key element of this FTA since it is a the core of MERCOSUR’s comparative advantages and still a major element of EU policy. Bargaining on Tariff-rate quotas (TRQ), the most favored tool of mercantilist policy makers for granting market access while keeping import’s control, is difficult. Finally, the possibility that Venezuela becomes a full member of the MERCOSUR could also change the conditions of these bilateral negotiations. For providing a very detailed analysis of the negotiations, we use the CEPII’s MIRAGE CGE dynamic model from CEPII. The policy relevance of this paper is threeofold: first, Venezuela’s joining in MERCOSUR is explicitly taken into account in the dynamic baseline. Second, simulations are run by considering plausible outcomes of the Doha Round, including its failure. Indeed, due to the ”one pocket” approach of the EU Commission, major concessions on agriculture in DDA will have negative effects on what will be offerered in the bilateral talks, and reciprocally. Last, between 2001 (GTAP 6) and 2004, trade patterns between Mercosur and EU have known important changes. So, to keep realistic reference situation for the negotiations, we update the trade flows that will be used in our simulations.. Liberalization scenarios (multilateral and regional) are defined at the finest level available using MAcMapHS6-v2. Thanks to this, we handle with care the issue of sensitive products and exceptions. Simulation scenarios lead to examine trade flows and welfare effects of EU-MERCOSUR trade agreement (average proposal between EU’s and MERCOSUR’s) with and without a successful multilateral trade agreement at the WTO.