On March 20, 2018, Canada began the first round of negotiations towards a comprehensive Canada-Mercosur free trade agreement (CMFTA). Canada recently announced that it intended to begin negotiations with Mercosur – a trading bloc comprised of Argentina, Brazil, Paraguay and Uruguay – with the first round of negotiations taking place in Ottawa from March 20 – 23.

BACKGROUND

The current negotiations towards a CMFTA are the result of a decision made by Canada and Mercosur in October 2017, to explore means to deepen their trade relationship. On February 23, 2018, Canada’s Minister of International Trade announced the conclusion of exploratory discussions on the possibility of a CMFTA.

The Government of Canada has characterized its interest in pursuing a CMFTA as part of a broader trade diversification strategy. Mercosur is the world’s fourth-largest trading bloc, with a combined gross domestic product of over C$3-trillion and a population of 260 million. Canada’s present bilateral trade with Mercosur is valued at approximately C$8.9-billion annually. Should a CMFTA be completed, the Government of Canada has estimated that 98 per cent of Canada’s present trade with South America would enjoy the benefits of preferential market access.

POTENTIAL SECTORAL BENEFITS

The Government of Canada has identified specific potential benefits of a CMFTA in certain key Canadian business sectors. For instance, a CMFTA could result in a reduction of tariffs imposed by Mercosur members on Canadian forestry products, which presently run as high as 35 per cent. Such a reduction would grant much-needed market access to Canadian exporters of forestry products, who exported goods valued at C$111.5-million to Mercosur members in 2017.

A CMFTA would also benefit the Canadian automotive sector, as Mercosur members presently impose customs duties as high as 35 per cent on Canadian automobiles. Doubling down on Canadian automotive exports to Mercosur – which in 2017 were valued at C$18.9-million – has been identified by the Government of Canada as a means to introduce diversity into the Canadian automotive sector, which presently exports the majority of its production to the United States market.

While the value of Canadian fish and seafood exports to Mercosur members has been relatively low – C$3-million in 2017 – the high customs tariffs applied to such goods, which range as high as 32 per cent, is likely a contributing factor to exporters’ reluctance in pursuing those markets. Should a CMFTA be completed, a reduction of those tariffs would undoubtedly increase Canadian interest in those markets.

Finally, the Government of Canada has identified potential benefits of a CMFTA for the industrial goods sector, another area where the Mercosur states maintain fairly high customs tariffs. For instance, the Mercosur members currently impose tariffs of up to 35 per cent on chemicals and plastics, 14 per cent on medical goods and pharmaceuticals, 20 per cent on aluminum, up to 35 per cent on industrial machinery and up to 35 per cent on information and communications technology.

COMMENTS

Canadian businesses should welcome the negotiations with Mercosur, as they are an indication that Canada is following through on its trade diversification strategy, especially at a time when the future of the North American Free Trade Agreement remains uncertain. Canada has taken steps to move away from its substantial reliance on the U.S. market by provisionally implementing the Comprehensive and Economic Trade Agreement (CETA) with the European Union on September 21, 2017, and by signing the Comprehensive and Progressive Agreement for Trans-Pacific Partnership with 10 other parties on March 8, 2018 (for more information, please see our March 2018 Blakes Bulletin: Canada Signs the Comprehensive and Progressive Agreement for Trans-Pacific Partnership). Should the present negotiations lead to a free trade agreement with Mercosur, this will further enhance and expand upon the bilateral free trade agreements Canada currently has in place in Central and South America – namely with Colombia, Costa Rica, Honduras, Panama, Chile and Peru. For more information on CETA, please see our comprehensive guide: CETA’s Impact on the Canadian Market.

While the U.S., and to a lesser extent Mexico, will likely continue to be the primary market for Canadian exports and source of imports, it is prudent for Canadian businesses to explore opportunities available in the markets of existing free trade partners and future anticipated free trade partners. Given that the Canada-Mercosur negotiations are in their very early stages, it is a good time for Canadian businesses to be actively involved in monitoring the negotiations and making their views known to the Canadian negotiating team, so that the final text of any agreement will provide the maximum benefits possible for Canadian importers and exporters.