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Brazilian elections: What impact on Mercosur talks with EU?

Emily Rees assesses the impact of this Sunday’s Brazilian presidential election on European investments in Latin America’s largest economy and what sort of role the new administration will likely play in helping to secure a trade agreement with the EU.

In an exceedingly polarised political climate, Brazilians are expected to turn up en masse to the polls on Sunday. The main contenders for the top job are Congressman (and former military official) Jair Bolsonaro on the far right and former São Paulo mayor Fernando Haddad on the left. While such a scenario appears to shake up the political spectrum, the opportunity to renovate the political class will be mostly missed.

This presidential campaign will remain ingrained in the collective psyche for its twisted scenario that even Brazil’s top telenovela scriptwriters would struggle to produce. First in August, in a televised vote that clenched Brazil, the Superior Electoral Court barred former President Luiz Inácio Lula da Silva from running under the ‘clean state’ law, leaving the Workers Party to find a new candidate. Then, a month before the vote, frontrunner Bolsonaro was stabbed during a rally and has since been campaigning from hospital, his campaign marred by protests about his misogynistic and homophobic outbursts.

Within this context, and as one would come to expect, trade and investment have not weighed in during grassroots campaigning. The EU is the largest foreign investor in Brazil and its second-biggest trading partner. What impact will the elections have for European investments in Latin America’s largest economy? Will the new administration hinder or boost a positive conclusion of the EU-Mercosur negotiations?

Haddad: a restrained Paulista spin on Workers Party priorities

Haddad, the Partido do Trabalhadores candidate, is running on the promise of pursuing Lula’s policies. In practice, if his experience as mayor of the largest South American city is anything to go by, his views somewhat stray from the classic developmentalism model historically advocated by his party. Under Haddad’s temperate Keynesian prism, income and employment remain core objectives, but without discounting the importance of tackling debt and simplifying taxes through fiscal reform.

A Haddad administration would plausibly continue to focus on trade liberalisation by concluding preferential agreements. A tilt, however, would be expected in terms of geographical focus. Rather than prioritising trade deals with high-income economies to the north, he is likely emphasise stronger South-South exchanges, in particular regional integration with neighbours in South America.

Although this does not bode well for a swift conclusion of the association agreement between Mercosur and the EU, finalising that pact is not off the table under this scenario. Haddad will also probably continue to incentivise European direct investment in infrastructure through regulated public-private partnerships and concessions viewed as necessary to reboot the economy.

Bolsonaro: ultra-liberalism or protectionist populism?

On the other side of the political spectrum is Bolosonaro, who is famed for his esteem of populist military despots and once claimed to “really not understand economics”. To gather market support, he has entrusted his fiscal, budgetary, monetary and trade policy to Paulo Guedes, a Chicago-trained economist with a penchant for libertarian economic theory. Guedes, who studied alongside the “Chicago boys” under the tutelage of free-marketer Milton Friedman, favours the privatisation of Brazilian state companies and drastic fiscal reform.

Guedes’ key trade proposals orbit around a radical liberalisation agenda that could hinge upon a unilateral removal of Brazilian tariff barriers and import quotas. This agenda, however, seems at odds with his candidate’s preference for hard-knocking Trump-like stated protectionism. Bolsonaro has been explicit in his willingness to tackle Chinese economic influence in the country – he wishes to curtail foreign investment in sectors viewed as of strategic national interest, such as energy, mining and health.

Marginal congressional support and impediments to reform

Whoever assumes the presidency next January is expected to administer the executive branch without majority support from Congress. Within the framework known as ‘presidencialismo de coalizão’ – or ‘coalition presidentialism’ – the president must build bridges with numerous parties, or reform will be held back. With 22 political parties represented in the federal Congress, this mechanism that has come to define the political and institutional functioning of Brazil requires that ministerial positions be handed to other parties to ensure governability and legislative support for the executive’s agenda. An effective coalition requires alliances that both have political width and geo-constituency depth.

For both frontrunners, such coalition-building will be a tall order as newly implemented corruption laws hamper political renovation. With corporate campaign funding prohibited, candidates rely on pre-existing party resources. This favours incumbents and the maintenance of status quo in Congress, a fait accompli that favours neither contender, even though Haddad would have a hand-up over Bolsonaro in such scenario.

Given the role of Congress in defining and approving trade and investment policy, radical liberalisation or drastic protectionism are de facto ruled out, even if strongly pushed by the executive branch.

What next for Mercosur and negotiations with the EU?

The EU and Mercosur have been discussing a preferential trade deal for almost 20 years. Outstanding items are no longer technical, but imminently political, as concessions on both sides must be made to bring the largest trade deal currently under negotiation to fruition.

Sunday’s election results in Brazil have the potential to destabilise the “alignment of the stars” within the Mercosur bloc on trade. However, given the importance of Congress in defining trade and investment policy, there is plenty of reason to believe that Brazil – which represents 70% of Mercosur’s GDP – will continue with a trade liberalisation agenda. Transition talks in coming months will provide a clearer vision as to the finalisation of the negotiations with the EU in 2019, once the new government accedes to power.

The question is less about if, and more about how much, Brazil is ready to concede in its pursuit for insertion into global value chains that it aspires to, and that will much depend on the election outcome.

 

Emily Rees (@emilyrees_eu) is a policy partner at Atlantico, providing public and government relations support in Europe and Latin America. A trade and investment specialist, she is a keen observer of Latin American political economy, having served as Head of EU Affairs for the Brazilian trade and investment agency, Apex-Brasil, and as deputy trade attaché of France to Brazil.

 

 

 

Opinion pieces published on Borderlex are those of their authors only.

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