Tradoc 135278

TRADE SIA OF THE ASSOCIATION AGREEMENT UNDER NEGOTIATION BETWEEN THE EUROPEAN COMMUNITY AND MERCOSUR
AUTOMOBILE SECTOR STUDY
FINAL REPORT
Consultation Draft
15th June 2007
This Report was commissioned and financed by the Commission of the European Communities. The views expressed herein are those of the Consultant, and do not represent any official view of the Commission. This Report has been prepared for the European Commission under Contract No: Trade 05-G3-01 - Specific Contract No 1
Trade SIA EU-Mercosur Partners IARC, Institute for Development Policy and Management (IDPM), University of Manchester Chaire Mercosur Copenhagen Economics ECOSTRAT Consultants, Brazil GRET (Groupe de Recherche et dEchanges Technologiques) Land Use Consultants Natural Resources Institute, University of Greenwich WISE Development (Women in Sustainable Enterprise Development)
Project website: http://www.sia-trade.org/mercosur Project email address: sia-trade@man.ac.uk
SIA of Mercosur Negotiations Automobiles Final Report
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CONTENTS Executive Summary ............................................................................................................... 10 1. Introduction ........................................................................................................................ 13 2. Trade SIA Methodology .................................................................................................... 14 2.1 The ECs Trade SIA Programme.................................................................................... 14 2.2 The SIA Methodology .................................................................................................... 15 2.2.1 Causal Chain Analysis ............................................................................................. 15 2.2.2 Scenarios .................................................................................................................. 16 2.2.3 Core Indicators......................................................................................................... 16 3. Overview of the Automobile Sector.................................................................................. 19 3.1 Introduction .................................................................................................................... 19 3.2 Definition and Characteristics ........................................................................................ 19 3.2.1 Definition ................................................................................................................. 19 3.2.2 Distinguishing Characteristics ................................................................................. 19 3.2.3 Ownership Pattern.................................................................................................... 21 3.2.4 The Global Automobile Market............................................................................... 22 3.4 The Mercosur Automobile Sector .................................................................................. 23 3.5 EUMercosur Trade and Investment Flows in the Automobile Sector.......................... 26 3.5.1 Investment Flows ..................................................................................................... 26 3.5.2 Trade Flows ............................................................................................................. 30 4. Sustainability Impact Assessment (SIA) for the Automobile Sector in MERCOSUR and EU..................................................................................................................................... 32 4.1 Introduction .................................................................................................................... 32 4.2 Trade Liberalisation Scenario......................................................................................... 32 4.3 Causal Chain Analysis.................................................................................................... 35 4.3.1 CGE Model Evidence .............................................................................................. 35 4.3.2 Partial Equilibrium Analysis Evidence.................................................................... 38 4.3.3 Case Studies Evidence ............................................................................................. 44 4.4 SIA for Mercosur Automobile Sector ............................................................................ 51 4.4.1 Economic Impact Assessment ................................................................................. 51 4.4.2 Social Impact Assessment........................................................................................ 56 4.4.3 Environmental Impact Assessment.......................................................................... 57 4.4.4 Process Indicator Assessment .................................................................................. 61 4.5 SIA for EU Automobile Sector ...................................................................................... 65 4.5.1 Economic Impact Assessment ................................................................................. 65 4.5.2 Social Impact Assessment........................................................................................ 66 4.5.3 Environmental Impact Assessment.......................................................................... 66 4.5.4 Process Impact Assessment ..................................................................................... 67 5.Mitigation and Enhancement Measures ........................................................................... 69 5.1 Introduction .................................................................................................................... 69 5.2 Industrial Policy for International Competitiveness and Growth ................................... 70 5.3 Trade Facilitation............................................................................................................ 72 5.4 Regulatory Quality ......................................................................................................... 75 5.5 Environment Related Flanking Measures...................................................................... 80 5.5.1 Biofuels .................................................................................................................... 81
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5.5.2 Fuel Efficiency Technology..................................................................................... 81 6. Consultation and Dissemination Activities ...................................................................... 83 6.1 Consultation Process....................................................................................................... 83 6.2 Networking activities...................................................................................................... 84 7. Conclusions ......................................................................................................................... 86 7.1 Main Findings................................................................................................................. 86 7.2 Flanking Measure Proposals........................................................................................... 87 8. References ........................................................................................................................... 89 Annex: Terms of Reference................................................................................................... 96
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LIST OF TABLES Table 2.1: Sustainability Indicators......................................................................................... 17 Table 3.1: South America: Net FI Inflows, 1991-2005 ($million) ......................................... 26 Table 3.2: Main Sectors and Ownership of Top 500 Companies, 2000-2004 ........................ 27 Table 3.3: EU FDI Stock in Latin America, 2001 (Outward stock, Millions Euros) ............. 29 Table 3.4: EU Mercosur Automotive Industry Trade (US$ Millions).................................... 30 Table 3.5: Argentinas Automotive Industry Imports by Destination as Share of Total Automotive Imports (%) .......................................................................................................... 30 Table 3.6: Brazils Automotive Industry Imports by Destination as Share of Total Automotive Imports (%) .......................................................................................................... 31 Table 3.7: Argentinas automotive industry exports by destination as share of total automotive exports (%) ............................................................................................................ 31 Table 3.8: Brazils automotive industry exports by destination as share of total automotive exports (%) ............................................................................................................................... 31 Table 4.1: Mercosur Trade with the EU 1996-2002 (US$bn)................................................. 32 Table 4.2: Mercosur Import Tariffs 2006................................................................................ 33 Table 4.3: European Union Import Tariffs-2006 .................................................................... 33 Table 4.4: Mercosur Non Tariff Barriers affecting EU Automotive Industry Exports........... 34 Table 4.5: Changes in Motor Vehicle Output and Employment............................................. 36 Table 4.6: Tobit model regression results for the gravity model for the Automobile Sector.... 42 Table 4.7: Domestic output, sales imports and exports (Brazil) (thousands of units) .......... 443 Table 4.8: Vehicle Manufacturing in Argentina (1992-2005) (thousand units) ................... 454 Table 4.9: Argentina Trade in Vehicles (US$m) ................................................................. 46 Table 4.10: Argentina Trade in Auto Parts (US$m) ........................................................... 465 Table 4.11: Total FDI stock in host economy (Millions $US)............................................... 487 Table 4.12: Vehicle Manufacturers Investments in Brazil ($US Millions) ............................. 49 Table 4.13: Largest Affiliates of Foreign TNCs Investing in Motor Vehicles ...................... 509 Table 4.14: Total Employment in Brazilian Automotive and Auto Part Industries: 1996 to 2005 (thousands) .............. 49 Table 4.15: CETM Results for Automobile Sector for Full Liberalisation Scenario (%change) .................................................................................................................................................. 52 Table 4.16: Tariff Revenue Effects, millions of dollars........................................................... 51 Table 4.17: SIA Impacts for Automotive Sector in Mercosur ................................................. 62 Table 4.18: EU Automobile Sector Output Changes (%) ........................................................ 65 Table 4.19: SIA Impacts for Automotive Sector in EU ........................................................... 67 Table 5.1: Trade Facilitation Costs ......................................................................................... 73 Table 5.2: Bureaucratic requirements to start a business ........................................................ 74 Table 5.3: Efficiency of Contract Enforcement Regulation.................................................... 75 Table 5.4: Efficiency of Closing a business............................................................................ 76 Table 5.5: Flexibility of labour regulation .............................................................................. 77 Table 6.1: Numbers of visits to the Mercosur website (November 06 April 07).................. 83 Table 6.2: Number of times that online reports have been accessed from Nov 06 April 07 83 Table 6.3: Access to Revised Overall Mid-Term Report and MTR Sectoral Studies (by language) .................................................................................................................................. 83
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LIST OF FIGURES Figure 2.1: Basic Principles of the Casual Chain analysis....................................................... 16 Figure 3.1: Net FDI Outflows from the EU and US to Mercosure, 1990-2002....................... 28 Figure 4.1: Automotive industry in Argentina and Brazil: Production, domestic sales exports and imports (1992-2004) in thousands of units........................................................................ 47
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ABBREVIATIONS ACEA ADEFA AFAC AMS ANFAVEA CAP CCA CEP CET CGE CIFOR CKD CoC CSR CTA DDA DFID DG EBA EC ECLAC EFTA ERRT EU FAO FDA FDI FERN FLEGT FOB GATS GATT GDP GFT GFW GM GNP GTAP HACCP HPDC IARC ICTSD IDPM IEEP European Vehicle Manufacturers Association Argentine Vehicle Manufacturers Association Argentine Automotive Components Association Aggregate Measure of Support Brazilian Vehicle Manufacturers Association Common Agricultural Policy Causal chain analysis Centre for Production Studies, Ministry of Economy Common External Tariff Computable General Equilibrium Center for International Forestry Research Completely Knocked Down Chain of Custody Corporate Social Responsibility Technical Centre for Agricultural and Rural Cooperation ACP-EU Doha Development Agenda UK Department for International Development Directorate General Everything But Arms European Commission Economic Commission for Latin America and the Caribbean European Free Trade Area European Retail Round Table European Union Food and Agricultural Organization of the United Nations Food and Drugs Administration Foreign Direct Investment Forests and the European Union Resource Network Forest law Enforcement, Governance and Trade Free On Board General Agreement on Trade in Services General Agreement on Tariffs and Trade Gross Domestic Product Government Financial Transfers Global Forest Watch General Motors Gross National Product Global Trade and Protection Hazard Analysis Critical Control Point Highly Protected Developing Country Impact Assessment Research Centre International Centre for Trade and Sustainable Development Institute for Development Policy and Management Institute for European Environmental Policy
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Intergovernmental Forum on Forests International Food Policy Research Institute International Institute for Sustainable Development International Monetary Fund Innovative Multipurpose Vehicles Institute of Applied Economic Research, Ministry of Planning, Budget and Public Management, Brazil IPEA IPF Intergovernmental Panel on Forests ISI Import Substitution Industrialisation ITC International Trade Commission ITTA International Tropical Timber Agreement ITTO International Tropical Timber Organisation LDC Least Developed Country LIDC Low Income Developing Country M and E Mitigation and Enhancement MAP Mercosur Automotive Policy MEAs Multilateral Environmental Agreements MEDC Major Exporting Developing Country MENA Middle East and North Africa MERCOPARTS Mercosur Auto Parts Manufacturers Council MERCOSUR Common Market of the Southern Cone MFA Multifibre Arrangement MFN Most-favoured-nation MNE Multinational Enterprise MOU Memorandum of Understanding NAFTA North American Free Trade Agreement NAMA Non-agricultural Market Access NGOs Non-governmental Organizations NSDS National Sustainable Development Strategies NTB Non-Tariff Barriers NTM Non-Tariff Measure ODC Other Developed Country ODI Overseas Development Institute OECD Organisation of Economic Co-operation and Development OICA International Organisation of Vehicle Manufacturers PPP Public Private Partnerships PROCONVE Programme for the Control of Automotive Emissions R&D Research and Development RA Representative Agent ROO Rules of Origin S&D Special and Differential SADC Southern African Development Community SCM Subsidies and Countervailing Measures SD Sustainable Development Secex, MDIC External Trade secretariat, Ministry of Development, Industry and Commerce, Brazil
IFF IFPRI IISD IMF IMV
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SIA SINDIPEAS SME SOBEET SPS SSA TBT TD/BU TOR TRIPS UN UNCED UNCTAD UNDESA UNDP UNEP US US$ USAID USDA VAT WHO WTO WWF
Sustainability Impact Assessment Brazilian Association of Auto Parts Manufacturers Small and Medium-sized Enterprises Brazilian Society for Study of Transnational Enterprise and Economic Globalisation Sanitary and Phytosanitary Measures Sub-Saharan Africa Technical Barriers to Trade Top Down/Bottom Up Terms of Reference Trade-Related Aspects of Intellectual Property Rights United Nations United Nations Conference on Environment and Development United Nations Conference on Trade and Development UN Department of Economic and Social Affairs United Nations Development Programme United Nations Environment Programme United States of America Dollars (United States of America) United States Agency for International Development United States Department of Agriculture Value Added Tax World Health Organization World Trade Organization World Wide Fund for Nature
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EXECUTIVE SUMMARY
The recommendations made in this daft report represent the views of the consultants and should not be interpreted as being endorsed by the European Commission. They are intended to form a basis for discussions among stakeholders and the practical implications of the recommendations will need to be examined in depth in order to evaluate their feasibility This report presents the results of a project undertaken for the European Commission to provide a sustainability impact assessment (SIA) of the automobile sector, as part of the Association Agreement under negotiation between the European Union and the Mercosur countries. The report provides the results of the sustainability impact assessment, and provides a number of proposals for flanking measures that would enhance the potential positive impacts and mitigate the likely negative impacts of trade liberalisation in the automobile sector. Main Findings The SIA analyses the impacts of a postulated trade liberalisation scenario for the automobile sector in the EU and Mercosur, in comparison with a baseline situation without such an agreement. The assessment is based on a liberalisation scenario where tariff and non tariff barriers relating to the automobile sector in Mercosur and the EU are gradually removed over a transition period of up to ten years. For the EU, the economic impacts are expected to be beneficial in terms of output and employment. Foreign investment flows from Europe to the Mercosur automobile sector will be encouraged by the liberalisation of trade and investment, and any accompanying reduction in trade facilitation costs. The distribution of gains from increased output and employment are likely to favour the EU10 countries with automobile production capacity. The investment benefits will accrue to those EU15 countries that have made significant investments in the Mercosur automobile sector over several decades. Economic benefits are expected to increase over time, as trade liberalisation increases the competitiveness and export potential of the automobile sector in Mercosur and increases the returns from European investments. The liberalisation of automobile sector trade is not expected to have significant social impacts in the EU. The potential environmental impacts in the EU would be related to any change in production that results from the liberalisation of trade with Mercosur, but given the enforcement of environmental standards and controls within the EU, any additional environmental pressures are unlikely to be significant. For Mercosur, the economic impacts of trade liberalisation in the automobile sector are also expected to be positive, as increased openness improves the international competitiveness of automobile manufacturing and parts production in Brazil and Argentina. There may be short term pressure on domestic producers and employment, particularly in the parts sector, as the sector adjusts to the challenge of competing against imported parts for use in domestic assembly plants. However, with the continued inflow of FDI, the share of exports in total production is expected to increase. Export growth and growth in the domestic market are likely to allow for the continued expansion of output and employment, although this is partly dependent on the continuation of a stable and predictable macroeconomic environment and investment climate.
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The potential social impacts of automobile sector liberalisation are not expected to be significant. The process of product redesign and upgrading induced by trade liberalisation may contribute positively in terms of increasing the skills endowment of the labour force. The environmental impacts will be related to the changes in production levels, changes in vehicle use, changes in trade, and changes in technology that result from trade liberalisation. Environmental quality can be expected to decline with increased production and vehicle use increasing air pollution. Over time, the magnitude of this scale effect is likely to be reduced as cleaner technology is incorporated into production methods and vehicle design. The impact on natural resources, including land conversation and water, can be linked to the increase in production of soya and sugar for use in production of bio-fuels. Biodiversity could also be adversely affected by changing agricultural patterns induced by the growing domestic and foreign demand for ethanol. As is the case of social impacts, the incremental environmental impacts attributable to trade liberalisation in the automobile sector is unlikely to be significant. However, considered in the wider context of economy-level trade liberalisation, the cumulative environmental (and social) impacts are expected to become more significant. Flanking Measure Proposals The future growth and development of the automobile sector in Mercosur and the EU will depend increasingly on the capacity to compete internationally in extra-regional markets. The proposals for flanking measures are designed to strengthen public-private cooperation within the framework of the proposed EU Mercosur Association Agreement, with the objective of exploiting the opportunities for win-win outcomes that will enhance the international competitiveness and growth of the automobile sector in Europe and Mercosur. It is proposed that the Mercosur Secretariat and the European Commission jointly establish an EU Mercosur Automobile Sector Forum with tripartite membership representing the interests of the European Commission, Mercosur, labour and employers. The Forum would provide an institutional framework in which areas could be identified where collaboration would be mutually beneficial to the future growth of the automobile sector. An immediate task of the forum would be to identify the areas for both potential gains (win-win) and tradeoffs (win-lose) in the ongoing negotiations on an Association Agreement between the EC and Mercosur. This could build on the analysis provided in this SIA, and confirm (or challenge) the SIA findings on the potential impact of an Agreement on output, investment employment, and long run international competitiveness, in the automobile sector in the EU and Mercosur. The proposed EU Mercosur Automobile Sector Forum could initiate detailed study on the following areas for flanking measures. First, an impact assessment study could be undertaken on the effect of EU and Mercosur trade facilitation costs on the automobile sectors trade performance. If the results of the study confirm that on-the-border trade facilitation costs are constraining the growth in automobile exports and imports, a programme of measures to reduce trade facilitation costs in Mercosur and the EU should be formulated. This programme should be based on identified problem areas and should be accompanied by an estimated cost of implementation. In the case of Mercosur, the proposed reform measures could be supported by the EU funding and technical assistance as part of the set of enhancement measures linked to the EU Mercosur Association Agreement negotiations.
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Second, a detailed assessment of the costs and benefits of regulation affecting the automobile sector should be undertaken for Mercosur and the EU. The study would consider the costs incurred by the automobile sector from regulation but should also consider the benefits that accrue to society at large, from the regulatory measures. The regulatory assessment would include an assessment of the significance of Mercosur and EU level regulations as a barrier to market entry by Mercosur and EU exports of automobiles, and the extent to which the replacement of regional-level regulations by international automobile technical standards would improve the international competitiveness of the auto sector in both regions. Based on the results of the RIA of automobile sector regulation, a programme of regulatory reform in Mercosur and the EU should be formulated, which aims to remove redundant regulatory measures and improve the efficiency and effectiveness of those regulations that are making a positive contribution to dealing with economic market imperfections, environmental protection and human safety and health. Third, a study should be undertaken on measures to reduce CO2 emissions from automobiles, as part of the ongoing discussions on the Association Agreement. The study would seek to identify initiatives that could be taken within the framework of the Association Agreement that would contribute to the mitigation of climate change effects resulting from vehicle use, focusing particularly on technology development and transfer opportunities in the areas of biofuels, engine design and emission control technology.
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1. INTRODUCTION This report is the Final SIA Report for the Automobile Sector, which has been prepared as part of the Phase 1 work programme of the Sustainability Impact Assessment (SIA) of the Association Agreement under negotiation between the European Community and Mercosur. The results of this final report for the Automobile Sector, together with the results of the parallel SIA sector studies for Forests and Agriculture, have been integrated into the Final Overall SIA for the EU Mercosur Association trade negotiations.1 The purpose of the SIA study is to inform trade negotiators and other interested parties on the potential economic, social and environmental impacts of the EU Mercosur negotiations with respect to the automobile sector. The study identifies, as far as possible in quantitative terms, the likely impacts on the three key areas of sustainability economic, social and environmental development of the different aspects of the proposed EU Mercosur trade agreement. On the basis of the identified impacts it proposes mitigation and enhancement measures in different areas of public policy, including trade policy. Based on the existing regulatory frameworks and domestic policies of the countries under review, suggestions are made on what complementary measures might be introduced to best address the negative impacts and maximise the positive impacts of further trade liberalisation and changes in rulemaking between the EU and Mercosur in the automobile sector. These include the various options for mitigating and enhancing measures, that could be introduced at domestic or regional level, in international fora, or in other areas of the ongoing negotiation processes. In accordance with the Terms of Reference, this Final Report for the Automobiles Sector includes the following elements: Introduction (Section 1) Trade SIA methodology (Section 2) Overview of the Automobile sector (Section 3) Results of the sustainability impact assessment (Section 4) Proposals for mitigation and enhancement (flanking) measures (Section 5) Consultation and dissemination activities (Section 6) Conclusions (Section 7) References and key sources (Section 8).
The Overall and Sector SIA Final Reports are available on the programme website www.sia-trade.org
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2. TRADE SIA METHODOLOGY 2.1 The ECs Trade SIA Programme The European Commission has been engaged in conducting Trade SIAs as part of its trade policy-making process since 1999. The European Unions approach to the impact assessment of trade policy goes beyond assessment of the effects in Europe, to assessing the impacts of proposed trade agreements on all aspects of sustainable development for its trading partners. The approach aims to make a significant contribution to regional and global governance, although to achieve this many challenges have to be overcome. As well as the general methodological difficulties of undertaking ex ante impact assessment at the policy level, the assessment has to evaluate the significance of economic impacts as well as social and environmental ones, and find appropriate entry points into complex decision-making processes.2 The purpose of SIA is to support better policy making, by providing decision makers with an evidence-based assessment of the potential positive and negative consequences of their policy choices. To achieve this, the analysis needs to be credible, evidence-based, and transparent. The results of the assessment also need to be provided to decision-makers at an early stage in the policy cycle, if they are to inform the decision-making process. The initial methodology for SIA of trade agreements was developed in early 1999, building on earlier North American experience of assessing the environmental impacts of trade policy.3 The methodology was subsequently refined and developed further for more detailed assessments4, and the European Commission has issued a handbook describing its current status. 5 With further refinements for each of the studies undertaken, the extended methodology has been applied to the WTO negotiations mandated by the WTO Ministerial Meeting in Doha, and to regional trade negotiations and agreements to which the EU is a party. 6 The European Commission has defined the objective of its SIA studies as a means of integrating sustainability into European trade policy:7 1. By analysing the issues of a trade negotiation with respect to sustainable development; 2. By informing negotiators of the possible social, environmental, and economic consequences of a trade agreement; 3. By providing guidelines to help in the design of possible flanking measures, the sphere of activity of which can exceed the commercial field (internal policy, capacity building, international regulation), and which makes it possible to maximise the positive impact and to reduce the negative impact of the trade negotiations in question. In 2006, DG Trade awarded a contract to a consortium led by the Impact Assessment Research Centre at Manchester University to undertake a Trade SIA of the Association Agreement under negotiation between the European Community and Mercosur. The first
2 3
See Kirkpatrick and George (2006) for a detailed discussion of these issues. Kirkpatrick, Lee and Morrissey 1999 4 Kirkpatrick and Lee 2002, George and Kirkpatrick, 2004 5 European Commission 2006 6 Details of the Trade SIA work programme and completed reports are provided on the DG Trade website. 7 European Commission 2002
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phase of the programme provides for an update of the initial preliminary Overview SIA of the proposed EU-Mercosur trade agreement that was undertaken for DG Trade in 2003.8 In addition to the Overview SIA, the current phase includes three detailed sectoral SIA studies: Automobile Sector Forestry Sector Agricultural Sector 2.2 The SIA Methodology The main components of the SIA methodology are: Screening and scoping Scenarios Assessment of impacts Evaluation of alternative preventative, mitigation and enhancement measures Consultation and stakeholder engagement The ongoing process of refinement and development of the SIA methodology has been maintained in the current study by incorporating economic modelling as one of the analytical tools that is used to inform the assessment of potentially significant sustainability impacts. 2.2.1 Causal Chain Analysis Causal Chain Analysis (CCA) is the fundamental building block for the SIA methodology, and is used to identify the significant cause-effect links between the proposed trade measure (scenario) and its final economic, social and environmental impacts. CCA aims first at (i) linking changes in a trade measure to changes in the incentives (prices) and opportunities (expanded market access), which can influence the production system and trade flows; and then at (ii) linking changes in the production system to sustainability impacts. The CCA draws on a range of sources for the evidence that informs the analysis, including: Theory, including international trade theory Quantitative data analysis Evidence from earlier studies Qualitative analysis based on the analysis of anticipated changes in the production system and trade flows; Case studies; Consultations and expert opinions. Successful application of the causal chain method requires separating the trade-related causes from other causes, which implies adopting a systems model of all the main factors affecting sustainability. A conceptual framework for the SIA is presented in Figure 1.
Planistat, 2003
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Figure 2.1: Basic Principles of the Casual Chain analysis

Trade measure or scenario: changes in tariffs and NTMs
Initial economic impacts influencing relative prices, incentives and opportunities
CCA
Changes in the production system
CCA
CCA
CCA
CCA
Economic impacts
Env. impacts
Social impacts
Process impacts
SUSTAINABILITY
2.2.2 Scenarios Scenarios are use in assessing the potential impacts of trade negotiations on sustainable development. For the EU Mercosur trade negotiations, two scenarios are used: Base scenario: no change in the current negotiated trade measures affecting EU and Mercosur trade, including no agreement on the trade liberalisation measures being discussed within the WTO Doha Development Agenda negotiations. The baseline scenario assumes, therefore, a continuation of existing trends in trade flows and current levels of tariff and non-tariff measures for the automobile sector. Further Liberalisation scenario: this represents the strongest probable implementation of the EU Mercosur trade negotiations.
2.2.3 Core Indicators Core indicators are used to assess the sustainability impacts (Table 2.1). For each of the core indicators second tier indicators can be used to specify the core indicators in more detail.
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Table 2.1: Sustainability Indicators Sustainability dimension Core indicator Economic Real income Fixed capital formation Employment Environmental Biodiversity Environmental quality Natural resource stocks Social Poverty Equity Health and education In addition to the nine core sustainability indicators, the methodology allows for two process indicators. Long term economic, social and environmental impacts may arise from the impact of the EU-Mercosur Association Agreement on underlying economic, social or environmental processes. Any effect that the trade agreement may have on accelerating, decelerating or otherwise altering any of these processes may have significant long term cumulative impacts on the economic, social or environmental aspects of sustainable development. The SIA methodology identifies two aggregative process indicators for such potential effects: - Consistency with sustainable development principles - Institutional capacity for effective sustainable development strategies The significance of the potential impact is shown using the following symbols: positive greater significant impact negative greater significant impact positive lesser significant impact negative lesser significant impact positive and negative impacts likely to be experienced according to context (may be lesser or greater as above) impact has been evaluated as non-significant compared with the base situation Sector specific Sector specific Second tier indicator Sector specific
Greater and lesser significance are defined in the SIA methodology as: - lesser significant impact marginally significant to the negotiation decision, and if negative, a potential candidate for mitigation - greater significant impact significant to the negotiation decision, and if negative, merits serious consideration for mitigation. Distinctions between greater and lesser significance are based on the importance of an impact for the particular economic, social or environmental factor concerned. They give no indication of relative importance of different impacts. The following factors are taken into account in evaluating significance: The extent of existing economic, social and environmental stress in affected areas; The direction of changes to base-line conditions;
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The nature, order of magnitude, geographic extent, duration and reversibility of changes; The regulatory and institutional capacity to implement mitigation and enhancement measures.
The impacts resulting from trade liberalisation occur over time, and in many instances there is a period of adjustment during which the significance or magnitude of the impact will change. This is allowed for in the SIA methodology by distinguishing between short term and long term impacts. The SIA methodology also allows for evaluation of possible preventative, mitigation or enhancement measures, subsequent to the assessment of potential impacts. These measures can be categorised as follows: Trade-related measures, which can be integrated into the trade agreement International and regional measures to improve the policy environment and strengthen national regulatory capacity National sectoral policy measures to remedy or regulate market imperfections National policy measures to mitigate adjustment costs.
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3. OVERVIEW OF THE AUTOMOBILE SECTOR 3.1 Introduction This sustainability impact assessment study is focused on the economic, social and environmental impacts arising from changes in the automobile sector in the EU and Mercosur that are expected to occur as a result of a trade agreement between Mercosur and the European Union. In order to provide a robust and credible analysis of the potential impacts of trade liberalisation in the automobile sector, it is necessary to define the sector itself, and to understand the underlying drivers of change within the automobile industry as a whole. The aim of this section of the report is to provide the background information which will then be used to inform the assessment of potential economic, social and environmental impacts. 3.2 Definition and Characteristics 3.2.1 Definition In the International Standard Industrial Classification (ISIC) the automobile sector includes vehicle production and parts and accessories production, and is defined at the 2-digit level under heading 34 as manufacture of motor vehicles, trailers and semi-trailers. The division is divided at the three digit level into: 341 manufacture of motor vehicles 342 manufacture of bodies (coachwork) for motor vehicles; manufacture of trailers and semi-trailers 343 manufacture of parts and accessories for motor vehicles and their engines Code 341 is classified at the 4 digit level to include: 3410 passenger cars, commercial vehicles (lorries, vans), buses and coaches, engines, chasses. This classification excludes agriculture tractors (2921), electrical parts used in vehicles (3190).
ISIC 35 covers manufacture of other transport equipment and covers: 351 building and repair of ships and boats 352 manufacture of railway and tramway locomotives and rolling stock 353 manufacture of aircraft and spaceship 359 manufacture of transport equipment nec ISIC 359 includes the manufacture of motorcycles (3591). The sale, maintenance and repair of motor vehicles and motor cycles and parts and accessories are classified under ISIC 50. For analytical purposes, it is helpful to define the sector in terms of its main characteristics. 3.2.2 Distinguishing Characteristics Production in the automobile sector is characterised by a high degree of segmentation between different stages in production, often involving different ownership and geographical location. It is common practice to distinguish between the following types of productive
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activity within the automobile sector: assemblers; system suppliers; first, second and third tier suppliers; and aftermarket product suppliers.9 A distinguishing feature of the automobile sector is the high degree of global integration in production activities. The value added chain is unbundled at the global level, with different stages in the production chain located in different countries. 10 With the lowering of trade barriers and advances in globalisation, production location decisions are increasingly determined by the international competitiveness of production in a particular location, rather than as was the case historically, by the size and growth potential of the domestic market. As a result of this vertical disintegration of production across borders, international competitiveness is determined at the level of different tasks within the automobile sector, rather than at the level of the industry.11 The pursuit of economies of scale has increased in importance for global vehicle companies as vehicle models are replaced more frequently and have become more complex and sophisticated. Economies of scale in assembly have been largely achieved, even though inefficient low-volume assembly continued in many emerging markets in the late 1990s. However, the search for economies of scale is still important in the areas of components production and vehicle design. For some components, economic production scales reach millions of units per year. As passenger vehicles become more complex, components such as engines, gearboxes and electronic systems become more sophisticated and complicated to produce. With trade liberalization in developing countries and the introduction of duty drawback schemes, the sourcing of more sophisticated components, particularly electronic products, for passenger vehicles assembled in developing countries has switched from domestic production to imports. For some items, production may be concentrated in just a few locations around the world. In design, the pursuit of achieving economies of scale has increased in importance for global vehicle companies as vehicle models are replaced more frequently and have become more complex and sophisticated. The engineering costs of designing new vehicles are substantial. Increasing safety requirements and customer sophistication in the areas of handling and ride have meant particular emphasis is put on the design of the platform, the floor plan of the vehicle and the suspension, steering, etc. In order to contain design costs, firms have been using common platforms for a variety of vehicles with the same market and extending platform commonality across markets. Companies such as VW and PSA use the same platform for different brand names within the company. Spreading platform design across various models significantly reduces costs, which are further reduced by maximizing the number of common components between models. The logical extension of this process is to maximize the number of common models across all markets, including developing countries. This not only reduces design costs, but also increases the speed with which new models can be introduced in non-core markets. The pursuit of global design is confronted with need for local adaptation of vehicles, and differentiation of models according to local income, customer preferences or standards and regulation. Strategies to develop a global model have so far failed due to significant differences in the market structure between developed and emerging markets. Corporate strategies in regard to globalization vary depending on the starting point of individual firms,
9
Humphrey and Memedovic, 2003 Dicken, 2006 11 Baldwin, 2006; Grossman and Rossi-Hansberg, 2006
10
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but there seems to be a large measure of convergence toward building vehicles where they are sold and designing vehicles with common platforms while retaining the ability to adapt other characteristics to local conditions.12 There are limitations to the standardization of models across markets; one consequence of this is that it opens up the possibility of certain developing countries becoming global specialists in the production of both vehicles and components. For example, Brazil specializes in the production of so-called third-world cars. These cars are specifically designed for markets in developing countries, with regard to both cost and durability. The Fiat Palio was first launched in Brazil, and although much of the design work was carried out in Italy, designers from both Fiat and first-tier component companies in Brazil were involved. If a group of developing countries constitutes a market with distinctive characteristics, and if the tariff and logistical barriers to trade between them can be reduced, then particular countries within the group may become specialists in the production of a certain type of vehicle. A further development of this process is the location of production centres for particular component options in developing countries. For example, sales of light trucks have increased across many markets. In North America, these trucks are predominantly supplied with automatic gearboxes. In Latin America and South East Asia, customers prefer manual gearboxes. This opens up the possibility that a global first-tier gearbox supplier will choose to concentrate the production of manual gearboxes in one or other of these regions.13 3.2.3 Ownership Pattern The globalisation of automobile production has occurred as part of the strategic decision making processes of the small number of multinationals that dominate the industry. At the beginning of the decade, the largest 20 firms produced more than 95 per cent of the worlds vehicles. At present, some 529 plants located in 45 countries are owned by 27 automakers.14 As for supplier plant location, 2211 plants located in 60 countries are owned by 150 automobile suppliers. With respect to engine production, 168 plants are located in 24 countries and owned by 16 companies. In the 1990s, the globalisation of competition, particularly the reduction and/or elimination of trade barriers and the need to find new emerging markets to compensate for stagnant home markets in the advanced economies encouraged vehicle manufacturers to adopt internationalisation strategies suited to the changing international context. That is, they chose to move beyond the stand-alone plant abroad to more integrated international production. This did not necessarily imply a globalisation strategy or a global automotive market, notwithstanding the production and marketing of so-called world cars. Instead, the significant level of joint inputs across plants and plant-level scale economies in the industry as well as government policy incentives pointed to internationalisation occurring either within the framework of regionalisation or in a format referred to as focused globalisation.15 The internationalisation strategies of multinational enterprises (MNEs) in the automotive industry prioritised reorganising their value chain so as to increase cost-effectiveness; they adapted their productive structure to the emergence of large trade blocs. These strategic priorities have encouraged the adoption of lean production on the one hand, and emphasised
12 13
Sturgeon and Florida, 2000 Humphrey and Memedovic 2003 14 Sturgeon and Florida, 2000 15 Freyssenet and Lung, 2000; Balcet and Enrietti, 2002
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specialisation and defining a regional division of labour on the other. This has often led to deverticalisation of MNE investments within a country to allow for cross-border specialisation and global sourcing, which only becomes feasible due to the implementation of complementary government policies such as trade liberalisation, de-regulation and other market-oriented reforms.16 3.2.4 The Global Automobile Market During the 1990s, production in the industry grew by 4.2 per cent overall. In the traditionally wealthy economies of North America, Japan and Western Europe (the Triad), the automobile industry is mature and characterised by overcapacity, cost pressures and low profitability. In contrast, in other countries the industry has expanded both in terms of production and sales. While vehicle sales in the Triad regions rose by 230,000 units in the period 1990-97, in the rest of the world sales increased by 3.8 million units. For vehicle production, the respective figures were 1.7 million and 5.1 million units.17 This rapid growth in non-Triad regions has been concentrated in a small number of developing countries, namely the Republic of Korea, Mexico, Brazil, China, India, the ASEAN countries and Eastern Europe. The trend observed in the last 15 years has been accompanied by large scale foreign direct investment flows to the regional markets where long term growth in demand is expected as the emerging economies continue to sustain long term economic growth. In the short term, this has led to over investment in some markets where capacity increases have exceeded realistic short term sales expectations. The geographical spread of vehicle output and growing sales in developing countries has not been accompanied by a spread of ownership in the assembly sector. Instead, driven by oligopolistic competition between global auto companies, increased competition at a global scale has led to further concentration. 3.3 The European Automobile Sector The European automotive industry is the largest automotive producing region in the world. The industry comprises nearly 34% of the worlds production of automobiles and approximately 7% of the manufacturing sector in the EU.18 There are six major automobile producers in the EU: Volkswagen, BMW, General Motors Europe, Renault, Fiat and DiamlerChrysler. Within the EU, production of motor vehicles as a share of total manufacturing is dominant in Sweden, Germany, France and Spain. The automotive sector, including the production of both vehicles and components, provided employment for over 2.2 million persons in 2004 and supported an additional 10 million indirect jobs in large companies and SMEs. In total, the industry accounts for abut 7% of total European manufacturing employment. The largest number of people working within the industry is in Germany, followed by France, the UK, Italy and Spain and these five countries accounted for nearly 90% of employment in 2002 in the sector. The automobile industry has a complex value chain and about two thirds of the value added in vehicle production comes from automotive suppliers while the retail and repairs sector
16 17
Doctor, 2003 Humphrey and Memedovic, 2003 18 EC, 2007b
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comprises 350,000 small and medium sized enterprises with a turnover of 529billion euros and employing about 2.5 million people.19 The automobile sector in Europe invests heavily in R&D and is the largest private investor in R&D in the EU, accounting for around 20% of all European manufacturing R&D. The growing importance of production in the new Member States is evident with an increasing share of total EU production from 4% in 2003 to 8% by 2005. In the new Member States, the industry at the national level is a major contributor to the economy in the States specialising in automotive manufacturing, such as the Czech Republic, Hungary and Poland. The enlargement of the EU has brought about integration of the auto sector in the accession countries, which consists primarily of local operations of trans-national companies, with inward foreign direct investment has playing an important role in the development of the sector in the new MSs A key area of competitive advantage of the new Member States is low wages and high productivity. The automotive industry is characterised by increasing competition on a world-wide scale, prompting all leading European automotive manufacturers to operate in all major regions of the world. Competition in such a diverse market requires high productivity, competitive pricing, product reliability and diversification, as well as technological innovation. Exchange rates play a key role in profit rates in such a global market. The industry has maintained a key international position both in exports, where it has increased in recent years, and in global sales. In 2004, automobile products accounted for about euros 78 billion of extra-EU exports and about euros 32 billion extra-EU imports with a positive trade balance of euros 46 billion. The home market in the EU is large and sophisticated and European brands dominate, giving the automotive industry a competitive home advantage within the EU. The German and French brands dominate market share and have expanded between 1998 and 2002, while the Italian and UK market presence declined over the same period. The EU automobile sector has an overall trade surplus with the rest of the world due mainly to its exports to the US and the Central and Eastern European countries. The automotive sector is characterised by a relatively low trade/sales ratio and marketoriented FDI is a dominant feature of the sector. 3.4 The Mercosur Automobile Sector20 In 2003, Mercosur had the seventh largest vehicle fleet in the world, and the largest among developing countries. In 2004, Mercosurs combined vehicle production of just less than 2.6 million units was ranked seventh in the world and third highest among developing countries with only China and South Korea producing more). In 2004, it exported just over 900 thousand units, making it the ninth largest exporter of vehicles in the world. The automobile sector in Mercosur is dominated by Brazil and Argentina. Automobiles are produced in Mercosur by subsidiaries of multinational corporations, in association with local investors. There is significant foreign involvement in the Mercosur automobile sector, with the presence of all the main European, American and Japanese vehicle manufacturers as well as many of the most important Tier 1 and 2 automotive parts and components suppliers.
19 20
EC, 2007b The Mid Term SIA Report for the Automobile Sector provides detailed case studies of the automobile sector and the parts sector in Mercosur.
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Production is mainly for the domestic and Mercosur markets. There are a small number of car manufacturers that do not have production facilities in the region and whose cars are only available through imports; these account for a small share of domestic sales in Brazil and Argentina and are subject to a more restrictive trade regime. Cars produced in Argentina and Brazil are mostly compact, small and medium cars, while models imported from other countries include larger vehicles and SUVs. Historically, the industry has been heavily protected, with few imports during the 1970s and 1980s. Integration of the two auto industries began officially with the signing of the Economic Complementation Agreement in Buenos Aires in 1990. This agreement allowed for tariff-free trade in automotive products between the two countries, subject to trade balancing and quotas. Quotas were also used to balance bilateral trade in units, and assigned to individual firms. Due to a combination of the signing of the Mercosur agreement, the reversal of trade liberalisation for vehicles adopted in Brazil in the early 1990s and the development of similar auto industry sectoral policies in both Argentina and Brazil, regional trade in the industry increased significantly during this period. The automobile sector was listed as an exception to the customs union that went into effect in 1995 and the initial timetable for free trade in the sector was set for 2000, later delayed to 2006. The first version of the Mercosur Automobile Policy (MAP) was signed by Brazil, Argentina and Uruguay in Florianopolis in December 2000, and then by Paraguay in March 2001. A revised agreement was accepted in Buenos Aires in July 2002, and formally signed on 26 September 2002 in Brasilia. A new transition agreement was signed on 23 June 2006. It is valid for two years, until 31 June 2008. The main changes in the new version of the MAP are with respect to the flex, which on Argentinas request was narrowed from 2.6 to 1.95 (this permitted US$ 195 worth of duty free vehicle imports for each US$ 100 exported to the other country). Brazil implicitly recognised the reserved 30% Argentine local content until a new auto parts sector agreement was signed. Brazil continued to apply a 40% discount off the CET for auto parts. The June 2006 agreement did not finalise a date for the end of the trade balancing arrangements, nor did it finalise provisions related to the auto parts sector. Instead, both sides agreed to evaluate the evolution of bilateral trade in vehicles and auto parts before defining a longer-term policy at the end of the transition period. By the late 1990s a regional automotive production system was developing in Mercosur, based on a complex division of labour in vehicle and components production between Argentina and Brazil. 21 Vehicles and components are flowing within the region in both directions, and there are important two-way flows of vehicles and components from Brazil to all of the Triad (NAFTA, Europe and Japan) economies. The global trends in the automobile sector that were described earlier have implications for the Mercosur automobile sector. Firstly, the increasing integration of the sector in the global value chain, and secondly, globalisation and specialization of production. Inward orientation of Brazilian industry can be illustrated clearly by examining domestic sales which accounted for more than three quarters of domestic output in 2003. Brazils automotive industry is specializing in small, low cost vehicles with high fuel economy, which are affordable to consumers with lower purchasing power. Specialization in compact automobiles has allowed the Brazilian economy to gain economies of scale and take advantage of new trade agreements. Furthermore, flexfuel cars, which run on a blend of ethanol and gasoline, are slowly replacing standard automobiles. In early 2006, about 77% of new cars sold had
21
Humphrey and Memedovic, 2003
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flexfuel engines. Inward orientation of Brazilian automobile industry and specialization in niche production of low-cost emerging market and flexfuel models protect its domestic market vis--vis the trade opening in the EU-Mercosur FTA, as Brazil is the biggest producer and consumer of this type of vehicle. The recent upsurge in export performance indicates increasing competitiveness of the sector in the world market but it is too early to predict whether this is a long term structural shift towards more export oriented strategies. The Argentinean automobile industry is strongly dependent on the Brazilian market for exports as well as being protected from surges in imports from Brazil by the Mercosur Automotive Policy. The industry focuses on producing more luxurious models, midsize and four-door models which under any EU-Mercosur trade liberalisation agreement could face competition from European manufacturers. The convergence of global automobile investment trends with economic policy and sectoral developments within Mercosur resulted in a wave of investment in the automotive industry during the 1990s. 22 , 23 Originally, most investments were conceived of as market-seeking (focused on the wider regional market), but subsequently, after a series of economic and financial crises hit the region, there was a sharp shift towards more export-oriented and efficiency-seeking strategies. During the 1990s, vehicle manufacturers often found that their priorities tied in with the policy inclinations of Mercosur members. Together, this resulted in industrial restructuring and rationalisation, modernisation of installations and models, and entry of new competitors into the Southern Cone automotive market. These factors all led to an increase in output, exports and production facilities within Mercosur. The investment strategies in the Mercosur automotive industry resulted in unprecedented levels of specialisation and trade in vehicles and auto parts. Vehicle manufacturers developed a new Mercosur-based production and market configuration, which sought to multiply the advantages of each country. This Mercosur automobile sector now has the following features:24 Up-dating the models produced and sold in the region; Producing high volume, small cars with small engines in Brazil; Producing small/medium cars with larger engines in Argentina; Importing large and luxury models from the USA and European Union; Using an increasing number of auto parts imported from within and outside the region; Placing growing emphasis on exporting beyond Mercosur.
Policy incentives and restraints, combined with favourable macro-economic conditions, reinforced corporate decisions to develop trade in the regional automotive industry. Intraregional trade as a share of total vehicle exports grew from less than 9% in 1986 to more than 58% in 2001. Brazilian vehicle exports to Argentina increased from under 38 thousand units in 1990 to more than 105 thousand units in 2000 (representing about 30% of Brazilian vehicle exports). Brazilian imports from Argentina increased from only 3,946 units in 1991, to over 120 thousand units in 2001 (representing about 69% of vehicle imports).
Ozden and Parodi, 2004 For example, in 1996, The Economist noted that "hardly a week goes by without the announcement of a new factory, a new model or a new entrant in Brazil." 24 Laplane & Sarti, 2000.
23
22
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The global conditions facing the Mercosur automotive industry have shifted significantly in the past few years for multiple reasons. Firstly, there is growing competition from China, both as a location for investment to supply the Chinese market, as well as a platform for export production. Secondly, many European-based vehicle manufacturers have preferred to invest more in Eastern Europe, which is seen as an alternative location to produce vehicles in an increasingly competitive world. Thirdly, global over-capacity in the industry is forcing the automobile multinationals to re-evaluate their commitments around the world. 3.5 EUMercosur Trade and Investment Flows in the Automobile Sector 3.5.1 Investment Flows The Mercosur region is a major recipient of foreign direct investment (FDI), and accounts for almost half of all FDI inflows to South America (Table 3.1) In 2005, FDI inflows to Mercosur totalled $20,398.5 million.25 Table 3.1: South America: Net FI Inflows, 1991-2005 ($million)
1991-1995b MERCOSUR Argentina Brazil Paraguay Uruguay Andean Community Bolivia Colombia Ecuador Peru Venezuela Chile South America Total (Latin America & the Caribbean) 6445.2 3781.5 2477.4 103.8 82.5 3685.5 158.4 911.9 368.1 1304.2 943.0 1666.2 11797.0 20205.8 1996-2000b 36757.1 11581.1 24823.6 185.1 187.2 10746.37 780..2 3081.1 692.4 2000.8 4192.2 5667.0 53170.7 70638.9 2001-2005b 19883.1 2980.6 16480.7 53.9 367.9 9701.1 271.1 3946.2 1370.1 1794.0 2319.8 5087.7 34671.9 58586.2 2004 22822.1 4273.9 18145.9 69.9 332.4 7674.0 62.6 3117.0 1160.3 1816.0 1518.0 7172.7 37668.8 61503.2 2005c 20398.5 4662.0 15066.3 69.9 600.3 16918.5 -279.6 10192.1 1530.2 2518.8 2957.0 7208.5 44525.4 68046.3
Source: ECLAC, 2005 a This does not include financial centres; FDI figures are equal to inflows of FDI minus capital outflows generated by foreign investors. The figures differ from those presented in the Preliminary Overview of the Economies of Latin America and the Caribbean, as the latter shows the net balance of foreign investment. b Annual average c Data available as of 24 April 2005
25
ECLAC, 2005
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For Latin America as a whole, the automobile sector is the largest foreign private owned sector accounting for 6 percent of total sales of the top 500 companies (Table 3.2). Vehicle parts companies account for a further 1.6 percent. Table 3.2: Main Sectors and Ownership of Top 500 Companies, 2000-2004
Sector 2000 2001 2002 State-owned Hydrocarbons Energy Mining Public services Transport Others Total state-owned 16.9 3.0 0.4 0.3 0.1 1.3 22.1 16.0 4.0 0.5 0.2 0.3 2.0 23.0 16.1 4.2 0.6 0.3 0.4 1.7 23.3 Local-Private Commerce Telecommunications Steel Soft drinks/beer Hydrocarbons Agribusiness Mining Cement Petrochemicals Energy Total local private 7.3 2.8 2.6 3.1 1.0 3.1 1.8 1.1 1.3 0.7 38.7 7.9 3.8 3.3 3.5 1.0 3.2 1.6 1.4 1.2 0.9 41.6 8.3 4.0 3.8 3.8 1.1 3.5 1.8 1.5 1.4 0.7 42.3 Foreign private Automobile Telecommunications Hydrocarbons Commerce Electronics Energy Agribusiness Autoparts 7.3 6.5 3.6 3.1 4.2 2.6 1.6 2.4 6.7 4.0 3.2 3.2 3.9 2.8 2.0 1.5 7.3 3.4 2.9 3.1 4.4 1.9 1.9 2.1 6.5 3.9 3.2 3.0 2.6 2.1 2.1 1.0 6.0 3.0 2.7 2.5 2.1 2.0 1.8 1.6 8.3 4.1 4.2 3.6 1.5 3.5 2.0 1.3 1.9 0.9 43.8 7.8 4.4 4.4 3.1 3.1 3.0 2.5 1.4 1.3 1.3 46.6 18.1 3.8 0.5 0.3 0.4 20 25.0 19.1 3.5 0.8 0.7 0.3 0.2 24.7 2003 2004
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Mining Chemicals Others Total foreign private Total 500 companies Total 500 companies (sales in billion $US)
0.4 0.9 6.6 39.2 100 852361
0.4 1.1 6.7 35.4 100 830433
0.8 1.0 5.6 34.4 100 734710
0.9 0.8 5.0 31.2 100 831772
1.5 1.3 3.6 28. 100 1073755
Source: Amann and Vodusek (2004) By the late 1990s, the European countries had become the major source of FDI flows to the Latin America and Caribbean region (Table 3.3). The EU is the main investor in South America, with a FDI stock of $137 billion compared to $83 billion for the United States (Figure 3.1). Figure 3.1: Net FDI Outflows from the EU and US to Mercosure, 1990-2002
Source: Amann and Vodusek (2004); Note: 1990-1995 is annual average. 2002: estimate, excluding Paraguay and Uruguay for US flows European FDI is concentrated in the Southern Cone countries, with the Mercosur countries accounting for 65% or $112 billion, of which Brazil is responsible for 38 percent ($66 billion) and Argentina for 26 percent ($44 billion). Spain is the most important European investor and Spanish assets in the region account represent around one-half of total EU FDI stock. There are marked variations in the sectoral allocation of European FDI.26 Spanish investments are concentrated in services sector, including telecommunications, financial services, public utilities, oil and gas production and distribution, while investments in manufacturing are of lesser importance. In the case of France, activities are concentrated in the public utilities sector (water, gas), telecommunications, as well as in the industrial sector (automobiles). German investments are predominantly in manufacturing automobiles production, machinery, chemicals; Italian investment is concentrated in telecommunications, automobiles
26
Amann and Vodusek (2004)
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and food processing. Investments from the UK are comparatively diversified and cover general services, manufacturing activities as well as the primary sector (natural resources and agriculture). Table 3.3: EU FDI Stock in Latin America, 2001 (Outward stock, Millions Euros)
Latin Americaa European Union (%) 194738 100 France Germany Netherlands United Kingdom Italy Portugal Otherb 19504 17829 12296 16963 9117 8515 110514 Argentina 50397 26 5553 2336 1646 3622 3147 96 33997 Brazil 74508 38 8389 7481 5223 4508 4648 8185 36074 Chile 15064 8 698 537 899 2947 91 16 9876 Columbia 5902 3 262 505 -533 2085 60 0 3522 Mexico 25945 13 1556 5102 2630 2283 387 88 13900 Venezuela 7493 4 1647 966 1075 666 229 5 2905
Source: Amann and Vodusek, 2004 a Eurostat Balance-of-Payments (BOP) Economic Zone of Latin America includes: Argentina, Bolivia, Brazil, Chile, Columbia, Costa Rica, Cuba, Ecuador, El Salvador, Guatemala, Honduras, Mexico Nicaragua, Panama, Paraguay, Peru, Uruguay and Venezuela b Other has been computed as the difference between the estimated EU aggregate and the sum of the selected declaring countries. Note: Data on Spanish assets in Latin America are not separately available: it can be assumed they account for a significant part of Other. The concentration of FDI in services is particularly strong in the Mercosur region. In Brazil, between 1997 and 2000, over 81 percent of all FDI inflows were to the services sector mainly privatised public utilities. A large part of these investments were made by European firms, and in particular, Spanish investors. However, with the deterioration in the global economic situation and the corporate credit retrenchment, this pattern changed: in the early years of the new decade, less than 60 percent of FDI inflows were undertaken in services, while the share of FDI in manufacturing rose to 35 percent in the same period.27 This shift in the composition of European investment in Mercosur in part reflected the influence of devaluations on foreign investment decisions. For the services sector, devaluation had adverse repercussions for foreign firms serving the domestic market. On the other hand, devaluation increased the international competitiveness of manufacturing, and foreign firms in Brazil and Argentina responded by increasing their exportsparticularly to the rest of Latin America. This led to new investment in the automobile sector, involving such firms as Volkswagen in Brazil and Peugeot Citroen in Argentina.
27
Amann and Vodusek, 2004
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3.5.2 Trade Flows Trade flows in automotive industry products, including road vehicles and other transport equipment between the EU and Mercosur are shown in Table 3.4. In 2004, EU imports of road vehicles from Mercosur totalled $585 million, which represented 1.7 percent of all EU imports from Mercosur. In the same year, the EUs exports of motor vehicles to Mercosur amounted to $2483 million, which represented 11.3 percent of total EU exports to Mercosur. Table 3.4: EU Mercosur Automotive Industry Trade (US$ Millions)
1999 Road vehicles EU imports from Mercosur EU exports to Mercosur Other transport equipment EU imports from Mercosur EU exports to Mercosur Total trade in goods EU imports from Mercosur EU exports to Mercosur 20,464 22,027 34,201 21,895 515 1,126 508 868 862 2,558 585 2,483 2004
Source: OECD
In 2005, the share of EU automobiles in Argentinas total automobile imports was 17%, compared to 34% in 1998 (Table 3.5). In Brazil, the share of vehicle imports from EU in total automobile imports has been stable over the past decade at around 40 percent (Table 3.6). Table 3.5: Argentinas Automotive Industry Imports by Destination as Share of Total Automotive Imports (%)
1998 EU25 NAFTA Mercosur Latin America Japan ROW Total Source: COMTRADE 34 9 45 1 8 3 100 1999 37 6 44 2 8 3 100 2000 28 8 52 1 7 3 100 2001 27 9 48 0 12 4 100 2002 25 12 51 0 9 1 100 2003 18 8 66 1 6 1 100 2004 15 9 70 0 5 1 100 2005 17 6 69 1 3 4 100
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Table 3.6: Brazils Automotive Industry Imports by Destination as Share of Total Automotive Imports (%)
1997 32 13 42 0 7 5 100 1998 32 12 43 0 7 5 100 1999 42 10 36 0 9 3 100 2000 35 13 36 1 9 5 100 2001 34 13 37 0 11 4 100 2002 43 15 27 0 11 4 100 2003 42 17 23 1 13 5 100 2005 38 13 28 0 13 7 100
EU25 NAFTA Mercosur Latin America Japan ROW Total
Source: COMTRADE For exports, the EU accounts for less than 10 percent of Argentinas total automobile exports (Table 3.7). For Brazil, the share is 15 percent of all automobile exports (Table 3.8). Table 3.7: Argentinas automotive industry exports by destination as share of total automotive exports (%)
1998 EU25 NAFTA Mercosur Latin America Japan ROW Total 4 4 89 3 0 1 100 1999 9 8 79 3 0 1 100 2000 9 9 78 4 0 1 100 2001 7 12 74 5 0 2 100 2002 9 25 54 9 0 4 100 2003 11 32 42 12 0 3 100 2004 8 31 44 13 0 4 100 2005 8 22 46 18 0 6 100
Source: COMTRADE Table 3.8: Brazils automotive industry exports by destination as share of total automotive exports (%)
1998 EU25 NAFTA Mercosur Latin America Japan ROW Total 16 18 44 15 0 7 100 1999 21 19 43 11 0 5 100 2000 25 30 32 8 0 5 100 2001 18 37 27 11 0 6 100 2002 14 42 18 16 0 10 100 2003 15 52 8 14 0 11 100 2004 14 45 14 11 0 15 100 2005 15 32 24 16 0 13 100
Source: COMTRADE
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4. SUSTAINABILITY IMPACT ASSESSMENT (SIA) FOR THE AUTOMOBILE SECTOR IN MERCOSUR AND EU 4.1 Introduction The SIA methodology assesses the potential impact of trade liberalisation on sustainable development in terms of nine core indicators, which together provide for a balanced consideration of the economic, social and environmental dimensions of sustainable development. In addition to the nine core indicators, the methodology also allows for any potential impact on the process dimensions of sustainable development, using two additional indicators. The results of the causal chain analysis are presented in a standard format that shows the significance of the potential positive and negative impacts in the automobile sector in Mercosur and the EU. The causal chain analysis and results of the SIA for the automobile sector in Mercosur and in the EU are presented in this section. 4.2 Trade Liberalisation Scenario In the SIA analysis, we assume a further liberalisation scenario whereby tariff and non tariff barriers on automobiles in Mercosur and the EU are progressively eliminated over a period of up to ten years. The EU accounts for around a quarter of Mercosur imports and exports. Until 1994, the balance of trade was favourable to Mercosur but since 1995 the situation has been reversed. Table 4.1 shows the trade flows for the period 1996-2000. Table 4.1: Mercosur Trade with the EU 19962002 (US$bn)
1996 Exports Imports Total Trade 18.3 21.9 40.2 20.1 25.7 46.6 1998 17.3 18.9 36.2 2000
Source: DATA INTAL Inter American Bank In 2005, the share of EU automobiles in Argentinas total automobile imports was 17%. In Brazil, the share of vehicle imports from EU in total automobile imports has been stable over the past decade at around 40 percent. The EU accounts for less than 10 percent of Argentinas total automobile exports. For Brazil, exports of automobiles to the EU account for 15 percent of all automobile exports. The external tariff on automobiles average 35 percent in Mercosur, and duties on auto parts range from 2 to 18 percent depending on local production. For imports into the EU, tariffs vary from 10 percent on passenger cars and light commercial vehicles to 22 percent on goods vehicles over 2500cc (Tables 4.2 and 4.3).
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Table 4.2: Mercosur Import Tariffs 2006

Type of Product Passenger Cars and Light Commercials* Trucks & Buses Cabins, Bodies, Chassis Trailers & Semi-trailers Agricultural Machinery Highway Equipment Autoparts Not Produced in Mercosur Autoparts with local production (three tables) 14% 14% 2% 14% - 16% - 18% 35% Tariff
Source: MAP; Note: *Only new cars may be imported Table 4.3: European Union Import Tariffs-2006
Type of Product Passenger Cars & Light Commercials (new & old) Goods vehicles (over 2500cc) Buses (10+ passengers) Motor Cycles/Scooters Agricultural Tractors Auto parts for Assembly (e.g. seat belts, break linings, gearboxes, wheels, shock absorbers, radiators, clutches, airbags, steering wheels, etc.) Tariff 10% 22% 16% 6%/8% 0%
3%
Pneumatic Tyres (new & old) Source: Taric
4.50%
There are also significant non tariff barriers on automobile imports from EU to Mercosur (Table 4.4). Procedures for the import of vehicles and auto parts into Mercosur act as a barrier to trade, in particular the non-harmonisation and co-ordination of procedures within the trade bloc. In addition, each of the four countries has different requirements.
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Table 4.4: Mercosur Non Tariff Barriers affecting EU Automotive Industry Exports
Type of Barrier/Country Argentina Arbitrary increases of tariffs and non transparent application, e.g. imposition of temporary additional duties. Description
Tariff Level Changes
Standards & Technical Requirements
Certificate of Homologation (CHAS) to ensure compliance of parts with Argentine safety norms (tyres; seat belts).
Quantitative Restrictions
Canal Morado to deal with under-invoicing. Requires reference pricing, which is a long and costly procedure with possible penalties attached.
Export Subsidies and Incentives
Variety of tax and tariff exemptions for imported capital goods and excise and sales tax exemptions for exported products.
Brazil Arbitrary increases and decreases of tariffs. Tariff Level Changes Alcohol production is subsidised indirectly discriminating against foreign suppliers. No clear separation between fuel alcohol and traditional alcohol markets.
Subsidies
Non-automatic import licensing
Request left pending without formal reply; goods stopped at border causing losses to exporters.
Import Ban on Used Goods
Used cars, motorcycles and tyres are all banned. WTO dispute settlement panel requested by EU to investigate ban on retreaded tyres.
Paraguay Time-consuming, expensive and difficult to fulfil procedures cause delays and raise logistics costs. High fines for errors.
Consular stamping Requirement
Representation Law
No national treatment for foreign firms; the law imposes high costs if foreign importer changes local representative or distributor. Unclear application of penalties.
Uruguay Import Ban on Used Goods Used cars, motorcycles, chassis and bodywork are generally banned (a few exceptions e.g. classic cars and racing cars).
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The automobile sector is regarded as a strategically important sector for industrial development in Mercosur and historically its development has been supported by trade protection and domestic market incentives and interventions. Rapid liberalisation is not regarded as a realistic scenario for the sector. In the EU - Mercosur negotiations, Mercosur has proposed a sequenced process of step tariff reduction and non tariff barrier removal. The EU would prefer a more rapid dismantling of trade barriers affecting the automobile sector. 4.3 Causal Chain Analysis Causal chain analysis (CCA) is used to develop an evidence-based and transparent understanding of the cause and effect linkages and interrelationships between the measure of trade liberalisation that is introduced (the trade liberalisation scenario compared to the base scenario) and the expected impact on the sustainability indicators. Much of the evidence that is used in the causal chain analysis is derived from the existing empirical literature on EU Mercosur trade and investment flows, and from case studies of the automobile sector in the two regions. 4.3.1 CGE Model Evidence A Computable General Equilibrium (CGE) modelling framework is frequently used in trade policy analysis. The CGE approach is based on the simulation of outcomes for a specified policy shock, and it has been widely used to estimate the impact of trade liberalisation. CGE economic modelling studies rely on an extensive economic theoretical framework largely based upon the logic of general equilibrium and neoclassical economic theory, where economic agents display rational optimisation behaviour. CGE trade model results are specific to the assumptions made with respect to the liberalisation scenario that is used to simulate the model, and to the specification of the model structure, especially assumptions regarding response elasticities. As a general rule, the greater the degree of trade liberalisation represented in the scenario (policy shock) and the more responsive the economy is assumed to be (as represented by structural parameters), the greater the effect of liberalisation predicted by the model. The model assumes that there is a single representative household, which allocates its expenditures over personal consumption today and savings (future consumption). The representative household owns all production factors and receives income by selling them to firms. It also receives income from tariff revenues. Part of the income is distributed as subsidy payments to some sectors. On the production side, firms use domestic production factors (capital, labour and land) and intermediate inputs from domestic and foreign sources to produce outputs in the most cost-efficient way that technology allows. Factor markets are competitive, and labour and capital are mobile between sectors. Prices on goods and factors adjust until all markets are simultaneously in equilibrium. The model assumes fixed net capital inflows and outflows. Since the CGE modelling approach predicts the post-liberalisation equilibrium outcomes where all markets have fully adjusted to the new set of economic incentives, it does not allow for the economic costs incurred as economies adjust to trade reform and move towards a new equilibrium. These adjustment costs can persist for a lengthy period of time, where supply side constraints are significant, and delay or prevent the economy from responding to changes in price incentives resulting from trade liberalisation. The adjustment costs are likely to be
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relatively greater in developing countries because they have less diversified economies with fewer alternative sources of employment than developed countries.28 The 2003 Preliminary EU Mercosur SIA29
The analysis in the Planistat preliminary overview SIA of the EU-Mercosur trade agreement was based on a purpose-developed GGE economic model. 30 For services and FDI, it was considered that the economic model would not be able to fully capture the impacts of trade policy changes, and so these were assessed separately in a parallel cross sector analysis.31 The model allowed wages to vary, and kept total employment effectively constant. Its results included changes in wage rates for skilled and unskilled labour, and changes in employment by sector under the equilibrium conditions that would occur once the economy has adjusted to the change in trading conditions. The data came primarily from the GTAP5 database, which has since been superseded by GTAP6. The baseline scenario of the first preliminary overview SIA included the assumption of a successful conclusion to the WTO Doha Round, and implementation of the Free Trade Area of the Americas (FTAA). These were implemented in the SIA along with the scenario for a postulated EU-Mercosur agreement. The liberalisation scenario assumed different levels of liberalisation for agriculture, non-agricultural goods, and services. For industrial products, the model assumed 100% elimination of duties and for non tariff measures a reduction in tariff equivalents was assumed. The model results for the motor vehicles sector project a decline in Mercosur output as a consequence of the EU-Mercosur Association Agreement (Table 4.5). Employment declines by similar percentages. The value of trade in cars is predicted to increase in both directions. The predicted changes in the Planitstat model are lower than those in the CETM, in part due to the less ambitious liberalisation assumed in the Planistat study. Table 4.5: Changes in Motor Vehicle Output and Employment
Argentina Output (i) Employment (ii) -13.0 -13.1 Brazil -16.1 -15.8
(i) share of sector output (ii) share of sector employment Source: Planistat (2003)
Polaski, 2006 Planistat,2003 30 Planistat, 2003 31 The model used in the Planistat study included a dynamic link, through which the direct income effects of trade liberalisation induce shifts in the regional pattern of savings and investment. Such effects can magnify income gains or losses. The results estimated changes in the capital stock, and the welfare and other implications of such changes. In practice, the results of the study showed little difference with and without the dynamic link.
29
28
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Bchir, Decreux and Gurin (2001)
This study used the MIRAGE model with GTAP 5 database. The model assumes perfect competition and monopolistic competition depending on the sector, full employment, and capital immobility as well as attempting to capture dynamic effects related to technological externalities and non-monotonic increased competition. The authors explicitly model these effects by adjusting factor reallocation to take effect over a specified period. The scenarios examined included full trade liberalization between EU and Mercosur and between Mercosur and other Latin American countries, as well as a combination of the two. These simulations were done in a seven geographical zones and in a nineteen sectors framework. The automobile sector output in Mercosur is predicted to decline by 1.0 percent. Flores (2004)
This study examined the changing dynamics of EUMercosur integration in the context of 2004 EU enlargement. As in the case of the previous models it used the GTAP 5 (1997) database but has extended it with the most recent Input-Output tables for Argentina and Brazil. Also this model assumes an interaction between perfect and imperfect competition. This approach captures scale effects, enhanced in larger markets created by free trade agreements, which are higher than those produced by perfect competition alternatives.32 As in the previous studies, the simulations are full (optimistic) and partial (realistic) liberalization scenario, where the latter excludes a large part of trade in the agriculture sector. The results show that GDP rises as a result of an agreement by about 1.5% under the full liberalization scenario and by 1.3% under the realistic one. For automobiles, the results are consistent with the earlier studies, showing a decline in the automobile sector output and an increase in trade flows under both full and partial liberalisation. CETM (2006)
For the EU Mercosur SIA study, an integrated CGE model (Copenhagen Economics Trade Model, CETM) was developed to provide a quantitative framework for estimating economic impacts and linking these to social and environmental impacts. 33 The CETM model calculates impacts on a wide range of economic variables for each individual country, including: Economic welfare (measured as equivalent variation) Real income Total employment Employment by sector Value added by sector Imports and exports by sector Tariff revenues
The GTAP 6 database provides the majority of the data for the empirical implementation of the model. The database is the most recently updated source for internally consistent data on production, consumption and international trade by country and sector on a global level. It is based on detailed national accounts and balance of payments data from both national sources
32 33
Baldwin and Venables, 1995 The full results are presented in the Overall Final Report.
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and international organisations. 34 The results of the CETM for the automobile sector are discussed in section 4.4 below. 4.3.2 Partial Equilibrium Analysis Evidence A further source of evidence which can be used to inform the causal chain analysis of the potential economic effects of trade liberalisation in the automobile sector is provided by quantitative sectoral level analyses. Brambilla (2005)
This study analyses the potential trade effects for the automobile sector in Brazil and Argentina of adopting a common external tariff and also removing non tariff barriers, and allows for the special arrangements for intra-Mercosur trade in automobiles, whereby in Argentina, imports from Brazil receive a different treatment from imports from other countries, and vice versa. The model allows for the oligopolistic character of the international automobile market and shows that the market structure has an important influence on the changes in imports and exports that result from trade liberalisation. Since automobile firms are subsidiaries of multinational corporations, the same agents are located in the two countries and are assumed to maximise profits jointly across the two markets. Each model of car is assumed to be produced in only one country, and the production cost and price elasticities are estimated directly from the behaviour of firms. The model shows that a reduction in the external tariff results in an increase in external imports and exports, if the MAP trade balance constraint is being met. Ozden and Parodi (2004)
In this study the focus is on the effect of Mercosur on FDI inflows to the automobile sector. Formation of a regional trade agreement such as Mercosur is often intended to increase the inflow of FDI attracted by being able to serve a larger market from a single facility. At the same time, there are concerns that the formation of the FTA can divert foreign direct investment from some member countries to others. These concerns were clearly felt by Argentina (and Uruguay) who feared that lower costs in Brazil would attract current and new FDI in the automobile sector away from Argentina. These concerns led to the Compensated Trade Clause which provides for the balancing of bilateral auto trade between Brazil and Mercour. Ozden and Parodi (2004) show that the CTC has been supported by the automobile MNCs; by requiring all firms to establish a production plant in both countries it benefited the incumbent firms at the expense of the new entrants, while still allowing firms to benefit from single plant economies of scale and specialisation in particular models.
Ivanow and Kirkpatrick (2007)
This study peovides a gravity model analysis of trade in automobiles and parts with special emphasis on analyzing internal policy constraints to export in the automobile sector. The study also analyzes the relative importance of trade-related measures and non-trade barriers to the development of EU and Mercosur trade in automobiles.
34
Compared to previous versions of the GTAP database, version 6 includes several important improvements with respect the EU-Mercosur context, all of which are incorporated in the CETM: improved domestic databases for Argentina and Brazil; improved treatment of data on services trade; and improved tariff coverage using MAcMaps data on preferential rates
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The analysis uses the gravity model approach to quantify export performance in relation to trade costs.35 Standard gravity models assume that the volume of trade between two countries is positively related to the size of these economies as measured by GDP and negatively related to the trade costs between them. A number of variables are normally used to capture trade costs. These include whether a country is landlocked or an island economy, the distance between the exporter and importer, as well as various dummy variables that indicate whether the country pair belongs to a regional trade agreement, or shares a common language, border or colonial heritage with its trade partner. The methodology augments the standard gravity model with policy variables that impact directly on the on-the-border and behind-the-border trade costs and assesses their relative importance in determining export performance. In particular, it constructs indicators of trade facilitation and regulatory quality and assess their relative importance in enhancing export performance in the automobile sector.36 The basic structure of the augmented model is as follows: ln EXPijt = 0 + ln 1GDPit + ln 2GDPjt + ln 3GDPpcit + ln 4GDPpcjt + ln 5Dij + ln 6REMOTEi + ln 7TARIFFji t + 8dRTAij + 9BORDERij + 10dLANGij + 11dCOLONYij + 12dISLANDij + 13dLANDLij + ln 14REGit + ln 15REGjt + ln 16TFit + ln 17TFjt + ln 18INFRAjt + ijt + e ijt (1) where i denotes the exporter, j denotes the importer, t denotes a year (t=2003, 2004) and the variables are defined as follows: 35
EXP ijt denotes the natural logarithm of exports in the automobile sector from i to j at time t, GDPi and GDPj is the natural logarithm of real GDP of exporting and importing country, respectively, GDPpci and GDPpcj is the natural logarithm of per capita GDP of exporting and importing country, respectively, . D is the distance between i and j, REMOTE is the remoteness variable measured as the weighted average distance to all other countries, weighted by GDP TARIFF is a simple average tariff applied by country j on country i products; LANG is a binary dummy variable which is unity if i and j have a common language and zero otherwise, COLONY is a binary variable which is unity if i and j were ever colonies after 1945 with the same colonizer, BORDER is a binary dummy variable which is unity if i and j share a common border, ISLAND is a variable which is 1 if one of the trade partner is an island economy and 2 if both partners are island economies and 0 otherwise, LANDL is a variable which is 1 if one of the trade partner is landlocked and 2 if both partners are landlocked and 0 otherwise, RTA is a binary variable that is unity if i and j both belong to the same regional trade agreement,
See Piermartini and Teh (2005) for a discussion on theoretical underpinnings and research questions analyzed in a gravity model framework. 36 We also include an infrastructure quality variable.
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TF is exporting countrys i or importing countrys j trade facilitation variable, REG is exporting countrys i or importing countrys j quality of regulation variable, INFRA is exporting countrys i or importing countrys j infrastructure variable, i(j)t is a set of importer and time fixed effects, e ijt is the error term that is assumed to be normally distributed with mean zero.
The model is estimated with 2 year data running from 2003 to 2004 for 110 countries37. It includes a time specific (yearly) and partner (importer) dummies in all regressions. The dataset contains around 10,000 observations of bilateral trade in the automobile sector. These data for all 110 countries are obtained from UN Comtrade database.The automobile sector id defined as commodities in SITC rev 2 categories 781 Passenger motor vehicles (excluding busses) to 784 Motor Vehicles parts and accessories. The standard variables used in gravity model analysis are included in our model, including a measure of simple average tariffs, obtained from TRAINS database 38 . Anderson and van Wincoop (2003) show that bilateral trade is determined by relative rather than absolute trade costs and to control for this factor we include a remoteness term in the model defined as the weighted average distance to all other countries, weighted by GDP. As a proxy for market size we include real GDP and GDP per capita at constant 2000 prices from the World Development Indicators. Other variables that are intended to capture variation in trade costs between country pairs such as distance, regional trade agreement membership, adjacency or whether countries share a common language or colonial past.39 The model is estimated with Tobit framework.40 This methodology is employed in order to correct for the censored depended variable problem which arises because that logged specification of the gravity model does not allow for trade values to take the values of zero41. Trade Facilitation Trade facilitation is defined as an aggregate index of trade facilitation based on time and costs of custom procedures from the World Banks Doing Business database. The index consists of the following components: number of all documents required to export/import goods time necessary to comply with all procedures required to export/import goods cost associated with all the procedures required to export/import good
Due to data availability we are unable to use panel techniques. Panel data estimates are much less sensitive to omitted variable bias because they do not assume that one year of data is representative of the long-run equilibrium. 38 We only include tariff variable in the regressions where we constrain the sample to EU and Mercosur countries. 39 Taken from the database in Rose (2004) 40 We use the Tobit model to correct for the missing zero values of trade as the common religion variable used in the Heckman-two-step procedure in the Final Overall SIA report is insignificant for the probability of trade occurring in the automobile sector model. 41 Two common approaches to handle the presence of zero trade include simply discarding the zeros from the sample or adding a constant factor to each observation on the dependent variable. This strategy is correct as long as the zeros are randomly distributed. However, if the zeros are not random, as is usually the case, then this induces a selection bias. Even though the proportion of observations with zero trade may vary somewhat depending on, among other things, the size of the sample, it is usually quite significant suggesting that the proper handling of these zeros is potentially very important. In our sample constrained to the automobiles sector , for example, over 50% of the trade volumes are zeros as the production in the industry is concentrated in more developed economies and is shaped by the global production networks.
37
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Regulatory Quality The main regulatory quality variables were also constructed using information relating to the cost effectiveness of regulation from the World Banks Doing Business initiative. This dataset contains information on time and money spent on bureaucratic procedures and thus gives a more precise and consistent account of regulatory efficiency relative to perception based indicators. Two indices are constructed: a contract enforcement index and a business regulation index. The contract enforcement regulation index consists of the following subcomponents: number of procedures in a court case involving bridging a contract; time in calendar days to resolve the dispute; cost in court fees and attorney fees, where the use of attorneys is mandatory or common, expressed as a percentage of the debt value. The business regulatory index measures restrictions in factor movement, across and within industries, and consists of three subcomponents: Labour legislation index is an average of three indices covering flexibility of hiring, conditions of employment and flexibility of firing constructed by Botero et. al. (2003) from detailed analysis of labour markets around the world. Index of business entry comprises of a number of all procedures required to register a firm, average time spent during each procedure, official cost of each procedure. Bankruptcy regulations consist of cost of the bankruptcy proceedings, average time to complete a procedure and a recovery rate, which calculates how many cents on the dollar claimants (creditors, tax authorities, and employees) recover from an insolvent firm. A domestic infrastructure indicator, which consists of data on the share of paved roads, road and rail density, per 1000 population and the number of telephone and mobile phone subscribers, per 1000 population, was also constructed using data obtained from the World Development Indicators and International Telecommunication Union. The original data used to construct the variables described above were derived from a variety of sources and are measured in different metrics. In order to ensure compatibility between the various variables used, all indicators were indexed and rescaled to vary from 0 to 1 so that higher quality of regulation, trade facilitation and infrastructure correspond to higher values of the index. The results of applying the model described in the previous section are presented in Table 54.6.42 The approach is to regress trade facilitation, regulatory quality and infrastructure on trade in the automobile sector while controlling for the standard gravity model controls such as country size and geographical indicators43. The regression in column 1 includes only standard gravity model variables that control for external trade costs and dummy variables for Mercosurs exports to EU and EUs exports to
In columns 1-3 we presents results of gravity model with data running for a 2 year period 2003-04 Our regulatory variables dataset are highly correlated, with an average coefficient of correlation of about 0.85, thus if included in the model their impact could be indistinguishable due to multicollinearity. They are therefore entered separately in the regressions.
43 42
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Mercosur. It is interesting to note that the same variables related to geography and culture are important for export performance in the automobiles sector as for the total exports results for which are presented in the main body of the Final Overall SIA Report. Both distance from a trade partner and remoteness from the rest of the world exert a negative, statistically significant effect on bilateral trade in automobiles. Our results also suggest that, ceteris paribus, countries that are members of Regional Trade Agreements trade more among themselves. The coefficient on EU automobile sector exports to Mercosur is positive and significant (although only at 10% level), indicating that EU displays higher exports in automobile sector to Mercosur than that predicted by the model. This result can be explained in terms of the long established position of European car manufacturers in the South American markets and consumer preferences in the region. The coefficient of Mercosur automobile exports to EU is insignificant indicating that the level of Mercosur exports to the EU is similar to exports is consistent with the overall export performance. Columns 2 and 3 show the gravity model regression results with indices intended to capture internal (on-the-border and behind-the-border) trade costs as proxied by trade facilitation environment and business regulation quality variables. As expected, both of these variables is significant at 1% level and has a positive impact on export performance. This result gives indications that on-the-border trade facilitation costs and behind-the-border regulatory costs are important for increasing exports in the automobile industry. Interestingly, the magnitude of the coefficient on trade facilitation is higher for the automobile sector than for overall trade (reported in the Overall Final Report) indicating the importance of efficient border procedures for the complex, just-in-time, supply management systems in this global industry. The size of the coefficients on regulatory quality (and infrastructure) are larger, however, than trade facilitation, suggesting that behind the border reforms may be at least as important as trade facilitation reforms as determinants of trade in automobiles. Column 3 of Table 4.6 includes interaction variables between regulatory quality, infrastructure and trade facilitation and the Mercosur dummy. These variables aim to isolate the effect of internal policy constrains and infrastructure environment on Mercosur exports in the automobile sector. As shown in column 3 these variables are insignificant in the regression indicating that the impact of on-the-border and behind-the-border policies is similar in Mercosur to the one estimated for the whole sample of countries. Finally, column 4 shows the results of a gravity model regression where the country sample is restricted to bilateral trade in automobile sector between EU and Mercosur countries. In order to accurately capture the impact of tariffs on trade in these regions we extend the data sample to the period 1996-04. The results show that variables related to market size as proxied by GDP and GDP per capita and variables capturing external costs such as distance and remoteness retain their significance with this data sample of countries. The negative and statistically significant coefficient on tariffs in the auto sector indicates that tariffs have limited market access for trade between EU and Mercosur.
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Table 4.6: Tobit model regression results for the gravity model for the Automobile Sector*.
Explanatory Variables GDP GDP partner GDP per capita GDP per capita Partner Distance Remoteness Tariffs Colony Language Landlocked Border RTA Mercosur - EU Exports Dummy EU - Mercosur Exports Dummy Contract Enforcement Business Regulation Trade Facilitation Infrastructure Business Reg* Mercosur Dummy Trade Facilitaion* Mercosur Dummy Infrastructure* Mercosur Dummy No. of Ob R2 / Pseudo R2 Prob > F 10238 0.5093 0.00 10238 0.5178 0.00 .299*** (.114) .380*** (.152) .788*** (.151) .194***(.066) -.231 (.151) .830*** (.121) .139*** (.023) -.097 (.265) .392** (.102) .366*** (.116) .477***(.131) .297*** (.113) .390*** (.152) 0.354 (0275) 0.249 (0.273) 0.648 (0.765) 10238 0.5207 0.00 1136 0.4297 0.00 .830*** (.151) .164*** (.067) -.470 (.355) .855*** (.122) .125*** (.023) .799*** (.151) .198*** (.067) -.462 (.355) .849*** (.122) .128*** (.023) (1) 1.375*** (.017) .053** (.020) .673*** (.016) .039* (.021) -1.54*** (.032) -.005*** (.001) (2) 1.356*** (.017) .058* (.027) .690*** (.016) .037* (.021) -1.53*** (.032) -.004** (0.01) (3) 1.364*** (.017) .027 (.039) .691*** (.016) .036* (.021) -1.52*** (.032) -.006** (.002) (4) 1.525*** (.046) .338*** (.093) 1.06***(.046) .302** (.096) -2.17***(.069) -.018*(0.09) -0.06***(0.01) .711(.390) .515 (.305) - .376(.213) .254 (.217)
*- For all tables * indicates significance at 10%, ** at 5% and *** at 1% level, respectively. Robust standard errors in parenthesis.
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4.3.3 Case Studies Evidence An examination of how the Brazilian and Argentinean auto sectors have evolved over time in response to changes in the international and domestic environment can provide useful insights into how the sector might be expected to respond to a permanent change in the level of protection on EUMercosur trade.44 Until the early 1990s the industry was strongly regulated by government policies that provided incentives for local production as part of a protectionist import substitution industrialisation strategy. Production was intended for the domestic market. In the 1990s, the introduction of new public policies focused on bringing about greater integration as the international economy began to change the structure and performance of the automobile sector. The automobile sector in Brazil was targeted as a key sector for attracting FDI and also for promoting popular (economy) cars for the local market. The Mercosur level trade equilibrium regulations were used to facilitate the integration of companies established in Argentina and Brazil. FDI flows increased and were aimed at the regional market and automobile production grew at an average rate of approximately 5%, allowing output to double in this period. However, the industry remained inward orientated, with domestic sales accounting for more than three quarters of domestic output. In 2002, domestic production accounted for 93% of the industrys total sales (Table 4.7). Table 4.7: Domestic output, sales imports and exports (Brazil) (thousands of units)
Output 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Source: ECLAC (2003) 914.5 960.2 1073.9 1391.4 1581.4 1629 1804.3 2069.7 1586.3 1356.7 1691.2 1817.1 1792.7 1827.7 Domestic output 712.6 770.9 740.3 1061.5 1206.8 1359.3 1506.8 1604.2 1187.7 1078.2 1315.3 1423 1383.3 1354.3 Imports 0.1 19.8 23.7 69.7 188.6 369 224 303.2 347.2 178.7 174.2 178.3 104.4 74.3 Exports 187.3 193.1 341.9 331.5 377.6 263 296.3 416.9 400.2 274.8 371.3 390.9 414.8 535.4
The growth in exports in recent years is explained in terms of domestic market conditions, rather than the lowering of trade tariffs and barriers. The main effect of the inflow of FDI was to increase productive capacity. In Brazil, capacity utilisation fell from above 80% in 1995 to
44
ECLAC, 2003, Ch.4
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55% at the beginning of the decade; the economic crises in the domestic and Mercosur market further increased the level of capacity underutilisation. The propensity to export by Brazilian automobile multinationals has shown a cyclical pattern, exporting according to prevailing conditions in the domestic and Mercosur markets. Successive devaluations have also encouraged Brazilian multinational companies to expand exports beyond Mercosur to prevent their profitability being squeezed by the imbalance between dollar denominated debt and local currency sales revenue. The Brazilian auto industry specialises in small, low cost vehicles with high fuel economy, which have been exported to lower and middle income markets in Latin America, rather than to Europe or North America. In 2002, Mexico replaced Argentina as the leading destination for Brazilian automobile exports. However, more recently currency appreciation in Brazil resulted in loss of export contracts. In Argentina, the automobile sector was adversely affected by the devaluation of the Brazilian real in 1999 and the overvaluation of the peso and subsequent economic crisis in Argentina. By 2002, the automotive industry production had declined down to 159 thousand units compared to 457 thousand units in 1998. (Table 4.8). Similar declines were experienced in domestic sales and exports. The sector experienced a US$ 118 million disinvestment in 2003. However, signs of a recovery were evident by 2004 as production, domestic sales, exports and investment experienced upward trends in the past three years. (Table 4.9) Table 4.8: Vehicle Manufacturing in Argentina (1992-2005) (thousand units)
Year 1992 1994 1996 1998 2000 2002 2004 2005
Vehicle Production
262
408
313
457
339
159
260
319
Total Vehicle Sales
342
508
376
455
306
82
311
402
Imports Exports Source: ADEFA
105 16
147 38
161 108
233 237
120 135
36 123
203 146
259 181
Although production in 2005 was still only 75% of record production in 1998, the 320 thousand cars produced were more than double the production of four years earlier. By mid 2006, Argentina had experienced fourteen straight quarters of growth with overall economic activity nearly 10% above the peak in the second quarter of 1998. In 2006, Argentine industry grew almost 9% year-on-year, while automotive industry production was up 33.9%. Market leader, Volkswagen, had 19.5% market share, followed by Ford (14.3%) and Chevrolet (14.1%). The heavy vehicles market also grew rapidly, recording a 51.4% year-onyear increase in sales in 2005. Since 85% of goods were transported by road in Argentina, a booming economy inevitably boosted light commercial and heavy vehicle sales. This very competitive market segment was divided amongst Mercedes-Benz, Ford, Scania and Iveco. The auto parts industry had also suffered under the Brazilian devaluation in 1999 and the later collapse of the Argentine economy in 2001. In July 2004, the government approved an agreement between local carmakers and auto parts firms limiting the value of imported auto
SIA of Mercosur Negotiations Automobiles Final Report page 45
parts to 40% of the total value of the vehicle. Since approximately 30% of the value is accounted for by labour costs, this leaves about 30% reserved for local auto parts firms. The new rules ignored the Mercosur arrangement which reserved 60% of parts for Mercosur, instead emphasising national rather than regional content. The agreement served to boost local auto parts sales in the domestic market, but many took advantage of their new-found competitiveness to also export (Table 4.10). Import sales are a relatively high proportion of total domestic sales. Brazil remains the main country of origin. The import of auto parts also fell from a peak of US$ 1.83 billion in 1998 to below US$ 500 million in 2002. However, the market recovered quickly and by 2005, auto parts imports were at US$ 1.45 billion. Brazil is also the main source for imports of auto parts, accounting for approximately a third of parts imports and Europe accounting for about 17%. Table 4.9: Argentina Trade in Vehicles (US$m)
EXPORTS Year 2000 2001 2002 2003 2004 2005 Value of Exports 1,544.90 1,591.70 1,194.20 976.5 1,465.00 2,174.70 % of Production 35.5 53.7 65.8 51.7 52 56 IMPORTS Value of Imports 1,546.30 1,093.20 353.4 952 2,134.70 2,970.60 % of Sales 35.6 44.3 36.6 51 61.2 63.4
Source: CEP Table 4.10: Argentina Trade in Auto Parts (US$m)

EXPORTS Year 2000 2001 2002 2003 2004 2005 Value of Exports 596.9 518.7 517.1 581.4 766.8 926.1 % of Production 32.3 33.7 43.2 41.7 43.2 44.7 IMPORTS Value of Imports 1,273.80 875.1 497.8 644 1,089.60 1,455.00 % of Sales 50.5 46.1 42.4 44.2 52 55.9
Source: CEP The devaluation of the peso had a positive impact on export competitiveness, and vehicle exports grew 35% to 146 thousand in 2004 another 50% to 220 thousand in 2005 and an estimated further 48.3% in 2006. Total value of automotive industry exports exceeded US$
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1.9 billion in 2004. Although the dependence on the Brazilian market declined from the 90% high-mark in 1998 to 30% of exports in 2004, export sales were still very concentrated with three markets receiving almost 90% of vehicle exports Mexico (43.5%), Brazil (30%) and Chile (15%). The auto parts sector also benefited from the devaluation, and in 2004, it contributed some US$ 767 million to the trade balance. Figure 4.1 shows the pattern of production, sales, exports and imports for Brazil and Argentina over the period 1992 to 2004. Figure 4.1: Automotive industry in Argentina and Brazil: Production, domestic sales exports and imports (1992-2004) in thousands of units
Source: UNCTAD 2005
The automobile sector in Brazil has developed strong production linkages with local parts supplier networks, and parts production now accounts for a significant share of the sectors output. 45 However, the automobile supply chain in Brazil has seen significant changes in recent years. The number of direct suppliers has fallen significantly from around 500 to 150. Likewise, the proportion of parts production for models produced outside Brazil has increased
45
ECLAC, 2003
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as part of the globalization of production chains. At the same time, growth in arms-length exports of parts by Brazilian companies is constrained by specialization in parts designed for the models in which Brazil specializes. Furthermore, the proportion of imported components used in models produced in Brazil has increased substantially. The Brazilian auto parts industry has experienced a sharp contraction in domestic demand and in local technological development capacity as a result of changes in automobile makers requirements, and strategies that gave attention to international competitiveness by using imported inputs and reducing domestic content. These structural changes are reflected in a reduction in sales volume and employment. Output fell from $17bn in 1997 to $10bn in 2002; employment from 231,000 jobs in 1992 to 168,000 in 2002. While exports have increased, imports have increased at a faster rate, resulting in a trade deficit for the parts sub-sector. The development of the automobile sector in Brazil and Argentina to supply domestic and regional demand has for a long time been a centrepiece in their industrial strategies. To this end, both countries established protection systems to attract inward investment and protect their domestic markets. The result has been a large and sustained inflow of FDI into the automobile sector in both countries. Table 4.11 shows that by 2000, FDI in automobiles accounted for 4.7 percent of total stock of FDI, and in Brazil the share of automobile FDI in total FDI stock was 6.5 percent. Table 4.11: Total FDI stock in host economy (Millions $US)
Argentina Motor vehicles and other transport equipment 1155 1139 1291 1414 2094 3235 3259 3010 3162 2765 Brazil Motor vehicles and other transport equipment 3569 5222 5587 5061 3360 3583 4734 6707 -
Total
As % of Total
Total
As % of Total
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
16303 18521 22428 27991 33589 42084 47898 62087 67770 68935
7.08 6.15 5.76 5.05 6.23 7.69 6.8 4.85 4.67 4.01
39975 47036 56549 41696 50195 65506 88778 103015 -
8.93 11.1 9.88 12.14 6.69 5.47 5.33 6.51 -
Source: UNCTAD (2005) Of the 20 biggest investors in Argentina between 1990 and 1996, seven were car companies (five of European origin). The sale of leading Brazilian companies to MNCs was clearly evident in the mid 1990s. In 1995, 10 of the 20 largest component manufacturers in Brazil were wholly or partially locally-owned; whereas by 1998, seven of these ten firms had been
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taken over by MNCs. There has also been a change in the ownership and control of automobile plants in Argentina, where Fiat and Renault took over former Argentine companies licensed to produce their cars. There are no purely domestic firms in the automobile sector in Argentina or Brazil. Table 4.12 shows the annual inflow of FDI into the motor vehicle sector in Brazil over the period 1993 to 2005. Annual data are not available for Argentina, but are estimated to total about $4.5 billion during the 1990s.
Table 4.12: Vehicle Manufacturers Investments in Brazil ($US Millions)

Year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Total Investment 886 1,195 1,694 2,359 2,092 2,335 1,791 1,651 1,750 976 673 739 1,050
Source: ANFAVEA
European vehicle manufacturers have a long tradition of investment in Latin especially in Brazil and Argentina (see Part 3 above). During the 1990s, there increased investment from European Tier 1 and 2 auto parts suppliers in the Mercosur market. Table 4.13 shows that European auto multinationals have investment involvement in both Argentina and Brazil
America, was also emerging a strong
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Table 4.13: Largest Affiliates of Foreign TNCs Investing in Motor Vehicles

Country of origin Argentina (2002) Ford Argentina PSA Peugeot-Citroen Argentina France Volkswagen Argentina Germany Renault Argentina France Brazil (2002) Volkswagen Brasil Grupo Fiat Brazil Ford Brasil Brasmotor Germany Italy USA USA 4404 2776 1622 1459 United States France Germany France 977 698 649 508 Millions $US
Source: UNCTAD (2005) The major exchange rate realignments in Brazil and Argentina in 1999 and 2002 improved the export competitiveness of the automobile sector and encouraged MNCs to switch production towards export markets outside Mercosur. Car manufacturers announced major new investment projects in 2004, mainly in Brazil but also in Argentina, notably export oriented projects in compact cars. FDI in the automobile industry that targeted the Mercosur market in the 1990s is shifting towards export-oriented production for markets outside Mercosur.46 a. The automobile sector accounts for less than one percent of total industrial employment in Brazil and Argentina. In Brazil, vehicle manufacturing employed over 100,000 in 2005, with the parts sector contributing a further 197,000 jobs (Table 4.14). Table 4.14: Total employment in Brazilian Automotive and Auto Parts Industries: 1996 to 2005 (thousands)
Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Automotive 111 115 93 94 99 94 92 91 102 107 Auto parts 193 186 167 167 170 170 168 171 187 197
Source: ANFAVEA and Sindipeas.
46
UNCTAD, 2005
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The trend in employment follows that of output, with a decline in the late 1990s during the period of macroeconomic and exchange rate instability followed by a recovery in recent years. Total employment in 2005 was similar to the level in 1996. The automobile sector employs a relatively high proportion of skilled labour. The educational and skill level of the labour employed in automobiles is significantly above the all-industry average reflecting the industrys relatively more sophisticated technology and needs for skilled labour. In Brazil, the difference in average education between the automobile industry and other industries is about 25%. In 1999, the National Residence Sample Research (PNAD showed that 43% of workers in automobiles had a complete high school degree or higher education, compared to the rest of industry level of less than 30%. Only 15% of labour in automobiles is categorised as unskilled. The automobile sector labour force in Argentina displays similar characteristics. The automobile industry in Brazil is also characterised by a relatively high proportion of male employment, at 83% compared to an all industry figure of 65%. 4.4 SIA for Mercosur Automobile Sector This section provides the SIA for the automobiles sector in Mercosur. The results of the assessment are presented in terms of the nine core indicators, covering the economic, social and environmental components of sustainable development. The estimated impacts on the process indicators are also presented. The findings of the SIA are recorded in tabular form, with shows the significant of each of the impacts and the differences (if any) in the expected short term and long term impacts. 4.4.1 Economic Impact Assessment Real Income The CGE modelling results discussed above indicate that a removal of protection barriers would shift labour and capital to other production activities which were internationally competitive and as a consequence, output in the automobile sector would decline. This was confirmed by the results of the CETM modelling work that was undertaken as part of the current EU-Mercosur Trade SIA. The CETM simulates a full liberalization scenario which assumes full tariff reductions between the Mercosur countries and EU-25, 100% liberalization of trade in services between the two trading blocs, and measures to facilitate trade amounting to 1% of the value of trade.47 The trade liberalization scenario used in the CETM simulations assumes that all trade barriers are removed and therefore gives an upper bound as to the possible effects of a potential free trade agreement. It does not attempt to capture the most likely outcome of any current or future negotiations between EU and Mercosur. For the automotive sector, the CETM predicts that output in the automobile sector in Mercosur would decline as a result of full liberalisation (Table 4.15). In Brazil, the share of motor vehicles in total output declines from 0.8 percent to 0.6 percent. In Argentina, the fall
47
Trade facilitation instruments aim to reduce less transparent trade barriers, such as customs procedures, product standards and conformance certifications, licensing requirements, and related administrative sources of trading costs.
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in motor vehicle output as a share of total output is from 0.9 percent to 0.8 percent. In the new equilibrium, when factors of production have been reallocated in response to the change in relative prices caused by trade liberalisation, employment levels in automobiles sector are also lower in both Brazil and Argentina. Exports of automobiles from Argentina increase while exports from Brazil are predicted to decline. Argentinas imports of motor vehicles increase, as do those of Brazil. Table 4.15: CETM Results for Automobile Sector for Full Liberalisation Scenario (%change) Argentina -0.1 -0.1 0.5 32.4 Brazil -0.2 -0.2 -16.6 118.1
Output (i) Employment (ii) Exports (iii) Imports (iv) (i) (ii) (iii (iv
automobile sector output as share of total GDP automobile sector employment as share of total employment change in value of automobile exports change in value of automobile imports
The CETM also provides estimates for the change in tax revenue associated with the removal of all import and export duties (Table 4.16). The estimates show a decline in tax revenues in Argentina, Brazil and Uruguay, and a small increase in Paraguay. Table 4.16: Tariff Revenue Effects, millions of dollars
base revenue Argentina Brazil Paraguay Uruguay Venezuela MERCOSUR associates Other South America EU15 EU10 ROW 1.984 5.609 151 246 2.175 3.625 6.725 20.861 6.207 183.166 new revenue 1.044 3.185 164 129 1.308 3.558 6.995 18.306 2.152 184.642 change -940 -2.424 13 -117 -867 -67 270 -2.556 -4.055 1.476
These results are dependent, however, on the assumptions that no other changes in economic parameters occur, that resources shift instantaneously between sectors, and that economic decisions are made entirely on the basis of market prices. In reality, changes in the output of the automobile sector will be determined by a complex set of factors relating to institutional
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and policy variables, corporate strategy and long term trends in productivity and market demand. Viewed in a dynamic perspective, trade liberalisation can expose domestic producers to greater competition, from imports. These competitive pressures can in turn stimulate growth in productivity. However, where there is market concentration and where the main producers are foreign owned, the response of producers to trade liberalisation is likely to be affected by the longer term global strategic goals of the automobile multinationals who increasingly privilege the search for efficiency over the search for markets in order to establish FDI financed international or regional production systems. What effect might a reduction in tariff levels and NTBs phased in over a period of ten years have on output levels in the automobile sector in Mercosur? Mercosur automobile imports are mainly more expensive models and specialist vehicles, which will have a relatively low price elasticity and limited substitutability with locally produced models. The reduction in the local price of imports following trade liberalisation is unlikely therefore to have a significant effect in terms of imports displacing local production. Similarly, the reduction in tariffs in the European market is unlikely to have a significant effect on the level of Mercosur automobile exports to the European market. This suggests that in the short term, liberalisation of trade with the EU is unlikely to have a significant impact on the output of the automobile assembly sector in Mercosur. In the longer term, however, the sector faces a challenge in maintaining momentum in export growth, given its current specialisation in the production of low cost vehicles designed for the local (Brazilian) market. Achieving sustained growth in exports will involve adapting production and designing models for global markets and achieving greater integration into global production chains. In turn, this has implications for national policy towards FDI in the automobile sector, with a shift away from policies intended to encourage production for the local market and removing any anti-export bias in automobile sector policy measures. As the industry moves towards greater international integration of production, and as income levels rise in Mercosur, a failure to adapt to the pressures of international competition is likely to make the local industry increasingly vulnerable to competition in export markets and to imports from Europe. In recent years, the Brazilian auto parts industry has experienced a sharp contraction in domestic demand and in local technological development capacity as a result of changes in automobile makers requirements, and the increased use of imported inputs as part of a global strategy aimed at ensuing international competitiveness. In so far as trade liberalisation reinforces these underlying processes of globalization and international competitiveness in the automobile sector, the short term impact on the parts sub-sector may be less benign than for end of line automobile manufacturing. A reduction in tariff and non-tariff barriers on imports of parts will reinforce the trend towards the use of imported rather than domestically produced parts by the multinational automobile assembly companies. In the longer term, the parts sector will face increasing pressure as the automobile multinationals strive to maintain international competitiveness by global sourcing of parts, thereby reducing the existing dependence on local production linkages. For multinational parts producers, future investment will reflect follow client strategies and locally owned SMEs producers of parts products will be increasingly vulnerable to changes in global sourcing by the manufacturing TNCs.
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To conclude, the impact of EU-Mercosur trade liberalisation on the output of the automobile sector in Mercosur can be expected to reinforce the existing trends towards global production chains and increased international competitiveness. In the short term, the vehicle manufacturing sub-sector is unlikely to change significantly in terms of its exports and imports with the EU. In the longer term, the lowering of import barriers can be expected to increase competition in the Mercosur market and imports from Europe may increase, as disposable income rises and consumer tastes change. The increased competition may also increase the pressure on local producers to diversify away from the dependence on domestic and Mercosur markets towards extra-Mercosur exports although this may require changes in product design which adapts the existing production of compact cars to the requirements in export markets. For the parts sub-sector, trade liberalisation is expected to intensify the pressure on local producers, as vehicle manufacturing firms increase the proportion of imported parts used in vehicle production. The weakening of the linkages of assembly firms with local parts companies increases the need to raise efficiency levels in the parts sub-sector and to target export markets. However, export growth is constrained by the earlier dependence of the sector on producing parts designed for the local market. These potential short and long term impacts of EU Mercosur trade liberalisation on the automobile sectors real income are summarised in Table 4.17. Investment What effect might EU Mercosur liberalisation have on investment in the automobile sector in Mercosur? The primary motive for the inflow of auto sector FDI in the 1990s was to supply the domestic market from local production. Here, the objectives of government policy and the multinationals were complementary, with foreign investors benefiting from various incentives provided by national and state governments. The key determinants of FDI for behind the border production are the size, stability and growth of the domestic market, the quality of the business environment that determines the costs of doing business in the country; and the soundness of macroeconomic conditions, including exchange rate policy and the regulatory controls on and other foreign capital transactions. The major exchange rate realignments in Brazil and Argentina in 1999 and 2002 improved the export competitiveness of the automobile sector and encouraged MNCs to switch production towards export markets outside Mercosur. Car manufacturers announced major new investment projects in 2004, mainly in Brazil but also in Argentina, notably export oriented projects in compact cars. FDI in the automobile industry that targeted the Mercosur market in the 1990s is shifting towards export-oriented production for markets outside Mercosur, particularly to Mexico with whom Mercosur members signed bilateral agreements that supported this new export strategy through the reduction of tariffs.48 In the short term, the reduction of tariff and non-tariff barriers is not expected to have a significant impact on the fundamentals of FDI flows. In the long term, the removal of nontariff barriers to trade and investment flows will contribute to an improvement in investors judgements of the business environment for inward foreign investment in the automobile sector. The removal of non-tariff constraints on trade and investment in the automobile sector
48
UNCTAD, 2003
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will facilitate the global production networking and associated export and import of parts and services, which is now a dominant feature of the industry. It would also act as a signal to European investors of a realignment of government policy towards raising the industrys productivity and international competitiveness as necessary conditions to establishing a sustained growth in automobile exports from Mercosur.49 At the same time, the liberalisation of trade and investment flows in Mercosur is likely to further expose the weaknesses in the supplier sub-sector. The potential short term and long term impacts of EU- Mercosur trade liberalisation on investment are recorded in Table 4.17. Employment How might employment in automobiles be affected by EUMersosur trade liberalisation? The new outward oriented development strategy of the 1990s and the increased globalization of production worldwide led to a FDI boom in the region. The impact of large FDI inflows on employment, however, was to a large extent disappointing, which can largely be explained by the form of investment.50 Economic liberalization led to increased competitiveness and thus to restructuring strategies in order to increase productivity, which often involved rationalization measures and, as a result, labour shedding. In addition, FDI mainly went into low to medium labour-intensive sectors. Already present manufacturing TNCs made little, if any, contribution to employment creation. Even though capital-intensive industries, such as automobiles and chemicals, were major recipients of FDI, these sectors experienced an overall decline in employment in the 1990s. On the other hand, they experienced a rise in productivity and competitiveness as well as a further export orientation of their products. Wages in FDI dominated sectors, including automobiles, rose above average in the manufacturing sector, especially with regard to skilled workers, which was mainly related to a rise in labour productivity.51 The CGE modelling of the full liberalisation scenario predicts a significant decline in employment in automobiles sector (-9.9% in Argentina and 28.6% in Brazil). These estimates show the long run changes that would occur if capital and labour shifted from automobiles production to sectors (mainly agriculture based) where comparative advantage is higher. In reality, however, the impact on employment will be determined by the investment and production decisions of automobile firms (predominantly foreign owned) and government, to the changes in the level of trade protection in Mercosur and the EU. As discussed above, there is unlikely to be a significant change in imports or exports in the short term, and it is expected therefore, that the short term impact on employment will also be insignificant. In the longer term, however, the main influences on employment growth in automobiles will be the growth of the domestic and export markets and the trend in labour saving productivity. The removal of protection can be expected to reinforce the underlying pressures on employment in the automobile sector as the firms continue to seek labour savings productivity gains and a reduction in the share of labour costs. The decline in employment due to productivity improvements will be offset by the growth in output for export markets where the productivity improvements raises the international competitiveness of Mercosur automobile
The potential impacts of liberalising trade with the EU are likely to be different from the effects of multilateral liberalisation of the automobile sector. In the latter case, the Mercosur automobile sector would face domestic market competition from imports from other low cost emerging market producers. 50 Ernst, 2005a 51 Ernst, 2005a
49
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exports. The trend towards global sourcing of parts could have an adverse impact on employment, although here also, the magnitude of the loss in jobs will depend partly on the capacity of the parts sector to improve its competitiveness through product redesign and production which can compete in international markets, allowing exports to replace the decline in demand from Mercosur auto producers for locally produced parts. The potential impact of EU Mercosur trade liberalisation on employment in the automobiles sector are shown in Table 4.15. 4.4.2 Social Impact Assessment. Poverty Although aggregate levels of absolute poverty in Mercosur are relatively low, poverty remains a serious problem for significant segments of the population. In Brazil, 10 per cent of the population exist on less than $1 per day and about one third of the of the poor live below the poverty line. There is significant unemployment and informal sector activity. There are also significant regional differences in income and poverty levels. A key objective of government has been to stimulate employment growth as a means of increasing the income of the poor. The labour force in automobiles is predominantly skilled and male. Wages are above the national average for manufacturing. The impact of trade liberalisation in the automobile sector is not expected therefore, to have a significant poverty impact. If labour is displaced by labour-saving technological change within the sector it can be expected to find alternative employment in other sectors where demand for skilled labour is growing. The potential impacts of EUMercosur trade liberalisation on poverty in Mercosur are shown in Table 4.17. Equity Persistent poverty in Mercosur, as in most Latin American countries, is largely a distributive problem. Inequality in the distribution of income is high, and this inequality undermines the potentially positive impacts of growth on the poor, as well as hindering growth itself. Where growth has been achieved, its potential positive trickle down impact on the poor, for example through low wage unskilled employment generation, has been reduced by the inequalities which are reflected in patterns of domestic market production and demand. Wage and income inequality in the automobile sector is already skewed in favour of higher income groups. Gender inequality is also high in the automobile sector. Regional governments have used incentives to attract automobile investment but the impact on new jobs has been limited and lower than hoped for. The liberalisation of trade in automobiles between Mercosur and Europe is not expected, therefore, to induce any significant changes in existing inequality levels. The potential impact of EUMercosur trade liberalisation are shown in Table 4.17.
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Health and Education The decline in tax revenue following trade liberalisation could result in some reduction in expenditure in education and health. However, the impact that can be attributed to any change in trade tax revenues from automobile imports will be insignificant. The long term process of productivity improvement and integration into global production export markets can be expected to stimulate improvement in labour and managerial skills in the automobile sector. There are potential indirect negative health impact associated with changes in the automobile sector as a result of trade liberalisation. Any increase in vehicle usage that is attributable to trade liberalisation will increase vehicle emissions, all other things being equal. This may have an adverse impact on heath conditions which are related to air quality. These impacts are discussed in detail below as part of the assessment of the environmental quality core indicator. The potential impact of EU Mercosur trade liberalisation in automobiles sector on education and health are shown in Table 4.17. 4.4.3 Environmental Impact Assessment Environmental Quality The effect of trade and investment liberalisation on the environment is theoretically ambiguous. 52 This is hardly surprising, given the complex interdependencies that exist between trade, investment, regulation and environmental quality. The different assumptions and possibilities in the theoretical literature suggest that the impact of trade liberalisation on environmental quality may not necessarily follow a single or unique pattern, and is likely to depend on country specifics, the nature of the environmental problem under investigation, as well as policy and institutional measures accompanying the trade reform process. EUMercosur trade liberalisation in the automobile sector is expected to reinforce the underlying trend within Mercosur towards greater openness and integration into the global production chains that characterise the industry. The inflow of FDI aimed at reducing the dependence on domestic market sales by increasing exports of vehicles and parts is likely to ensure a continuation of the upward trend in production which has been experienced since the early 2000s . The scale effect of trade liberalisation can therefore be expected, ceteris paribus, to be negative in terms of additional environmental costs related to production and consumption of motor vehicles. The composition effect of trade liberalisation is not expected to be significant for the automobile sector, given its capacity to respond positively over time to the increased competitiveness pressures induced by trade liberalisation. The technology effect of trade liberalisation in Mercosur may be more significant for the automobile sector, if it leads to the adoption of environment-saving production methods, either through the increased imports of environmental goods and services or through imported technology embodied in foreign investment.
52
Kirkpatrick and Scrieciu, 2006a
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Air pollution is a primary negative externality of automobile usage and production. Green House Gases (GHGs) from automobiles are a significant contributor to global warming. Respiratory illnesses from automobile emissions, including particulate matter and other harmful substances, is a leading cause of morbidity and mortality. With the predicted growth in automobile production in the largest manufacturing countries of Brazil and Argentina, emissions from automobile production locally are likely to increase. On the other hand, any change in technology towards cleaner methods of production will have an offsetting effect. Continued growth in domestic market demand will also contribute to increased air pollution. Increased air emissions from greater automotive use and production could potentially affect the local economy in different ways. Rising emissions in the Mercosur countries are likely to lead to increased health costs from higher levels of morbidity and mortality.53 An increase in automotive use results in increased respirable particulate matter (most widely studied are PM2.5 and PM10) and epidemiological studies have shown such pollutants to have the extensive negative impacts on health. Air pollution can have a negative direct impact on welfare of the population exposed to reduced air quality and this can have direct and indirect economic costs, primarily in the form of increased morbidity and mortality. A study for Sao Paulo, Brazil, showed dramatic reductions in deaths and illnesses related to air pollution ( asthma and acute bronchitis) could be avoided if PM10 levels were reduced.54 Automobile emissions are, nonetheless, difficult to measure due to variation in simulated tests compared to actual driving cycles. 55 There are over 12 characteristics of a vehicle, (e.g. engine size and fuel use), combined with numerous driving scenarios (e.g. idling vs. stop-go traffic) that ultimately effect emissions levels. In the Brazilian context, the choice of fuel has a significant effect on emissions. Therefore, knowing precise reductions attributable to different policies (fuel use efficiency vs. engine type) is not straight forward.56 Brazil has been at the forefront in developing fuel technology of growing interest to the automotive industry and policy-makers worldwide. Ethanol technology is already mature in Brazil, and the country accounts for 38% of world ethanol production. Infrastructure is also already in place to deal with the distribution57 and supply of bio-fuels. By 2003, Brazil had launched its first flex-fuel cars, which ran on any blend of ethanol and gasoline. By 2006, seven car makers produced flex-fuel cars for the domestic market (many with tri-fuel engines): Volkswagen, GM, Fiat, Ford, Renault, Peugeot and Citron. Honda expected to launch its flex-fuel car by end 2006 and Toyota was to follow in 2007. In early 2006, about 77% of new cars sold had flex-fuel engines, and this trend looked set to continue. The shift towards bio-fuels has been encouraged by government regulation. In Brazil, the government has developed a programme to support bio-fuel production with the so-called social fuel label. This was only available to mills that bought a minimum percentage of their source crops from small family holdings and poor farmers. 500 million litres of this type of bio-fuel was produced in 2005, and the volume of the special label fuel was growing.
Lopez-Silva, 2004 Cifuentes, Borja-Aburto et al. 2001 55 (Wang, Lyons et al. 2000) 56 The most common practice is to describe emissions and fuel consumption from motor vehicles by an average value over a trip Fuel economy regulation can be formalised as E = (P/G * G/M) where (E) emissions per mile of driving equals emissions per gallon (P/G) multiplied by gallons per mile (G/M). 57 There are over 30,000 filling stations that sell pure ethanol or a blend at pumps.
54
53
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Among Mercosur governments, Brazil is probably most advanced in its policies towards controlling emissions, dealing with solid wastes and chemicals, and other environmental concerns arising from vehicle use. A good example of this is the 20 year old National Programme for the Control of Automotive Emissions (PROCONVE), which reduced polluting emissions at source (the vehicle) significantly since its inception in 1985. An additional environmental issue related to the automobile sector relates to the import of used tyres, which was prohibited in Brazil from 1991 (there was a special procedure available for tyre re-treaders). Tyres are difficult to discard since they do not bio-degrade making disposing of used tyres an important public concern. Brazil, like the EU, only allows tyres to be re-treaded once. The government argued that imports of used tyres only have a half-life where after they only added to the problem of their disposal. Although the EU complained about this to the WTO, Brazil argued that the used tyre import ban only sought to protect the environment and public health.58 All of these environmental consequences of increased automobile production and consumption are trends that will continue independently of EU Mercosur trade liberalisation and any environmental quality impacts attributable to trade liberalisation will be incremental to these underlying trends. The impact of trade liberalisation on environmental quality is expected therefore to be insignificant in terms of air quality. As a consequence, the incremental impact on human health from increased vehicle use and production that occurs as a result of trade and investment liberalisation is also likely to be insignificant. The impact of EU-Mercosur trade liberalisation on environmental quality is shown in Table 4.17 Natural Resources In Brazil, soya-based biofuel production represents a significant share of their activities to substitute away from traditional, petroleum based fuels towards alternative energy sources. Despite their renewable nature and reduced emissions of known GHGs, there are other externalities associated with biofuel production that are not wholly accounted for in traditionally estimated production costs (which normally include estimates of cost of the feedstock and of its conversion to biofuel. Environmental externalities associated with an increase in biofuel from soya will have many ecological, economic and social implications in the region (particularly in Brazil).59 These pressures will add to impacts linked to sugarcane produced for use in ethanol production. Farming land is being converted to meet the demand of sugarcane and soybeans in the region, with a potential negative impact on food security for low income households60 Small farms are being purchased by much larger ones and land is converted to mechanised crop production, eliminating rural jobs. 61 The social and health implications of rising income inequality are widely cited. 62 Agrochemical use in soy cultivation is also believed to be
58 59
Brazilian Ministry of Environment (www.mma.gov.br). See Fearnside (2001) for a comprehensive summary 60 Recent press reports have highlighted the tortilla crisis in Mexico caused by the USAs growing demand for gain based fuel ethanol which has tripled the price of corn which constitutes the staple diet among the poor. 61 Fearnside, 2001 62 Refer to Deaton (2003) for a comprehensive review of the literature
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having a significant impact on the local environment as well as farmer health among those most widely exposed. The impact of trade liberalisation in the automobile sector on natural resources in Mercosur, particularly in Brazil, will be mainly indirect, as increased vehicle use impacts on increased demand for bio-fuels based on sugar and soya production. Environmental externalities associated with an increase in biofuel from soya will have a range of ecological, economic and social implications in the region.63 However, the additional pressure on natural resources in terms of the linked environmental and social impacts that can be attributed to trade liberalisation are unlikely to be significant, relative to the underlying pressures associated with the international growth in bio-fuels. The impact of EU Mercosur trade liberalisation on natural resources is recorded Table 4.17. Biodiversity An increase in demand for flexi and alternative fuels to accommodate the desire for cleaner air and a reduced dependence on petroleum products, will have implications for biodiversity64. The Brazilian Amazon has experienced the worlds highest absolute rate of forest destruction in the world and rates are likely to continue as the government plans to invest $40 billion from 2000 to 2007 in major new highways and infrastructure projects including those supporting soya production and transportation.65 Sugar and soya production is a significant potential threat to biodiversity in Brazil. Lost environmental services from conversion of forest and protected lands is very high. 66 The Brazilian cerrado has suffered in particular from the advancement of soybean production.67 Dinerstein et al (1995) have reported areas of cerrado that have biodiversity importance on the same level as the Amazonian rainforest, yet it remains one of the least-protected ecosystems in Brazil and the most vulnerable to expanding soybean production. Agrochemical use in production can likewise impact on biodiversity of local animal populations, as high doses concentrate in the lakes and fish.68 Changes to biodiversity have long-term social, economic as well as ecological impacts. As biodiversity in Mercosur is lost (particularly the impact on the cerrado and rain forest, in the face of increased demand for agricultural lands), the provision of goods in the form of food and fuel will decrease, but also medicinal and genetic resources will be lost. There are significant economic benefits from tourism (ecotourism) in ecologically-rich countries, including indirect benefits such as local employment and knowledge of resources.69 Potential revenue from properly managed ecologically rich areas is significant and could benefit the poorest populations in the region most dependent on the health of natural ecosystems. Social costs of lost and or altered biodiversity include cultural, spiritual, historical and intellectual links.70
63 64
See Fearnside (2001) for an excellent, comprehensive summary The production of second generation bio fuels may lower the environmental pressures 65 Fearnside 2001; Laurance, Cochrane et al. 2001 66 (Nepstad, McGrath et al. 2002) 67 Fearnside, 2001 68 Fearnside, 2001 69 Chapin et al 2000) 70 Chapin, Zavaleta et al. 2000)
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The impacts on biodiversity that can be attributed to EU Mercosur liberalisation are unlikely to be significant, compared to the underlying pressures related to the long run process of economic growth and development. These potential impacts are therefore recorded Table 4.15 as insignificant. The assessment of the potential environmental impacts in Mercosur of EUMercosur trade liberalisation in the automobile sector has found the likely effects to be insignificant. However, considered as part of an economy-level liberalisation to trade, the impacts attributable to the automobile sector will contribute to the cumulative environmental impact of trade liberalisation. As shown in the Overall SIA for EU Mercosur trade liberalisation, these cumulative impacts are likely to become significant. Considered as part of the overall environmental impact of economy-level trade liberalisation, the potential long term negative impacts of trade liberalisation in automobiles are expected to be significant. Prevention of these negative impacts will require immediate consideration of appropriate preventative and mitigation measures. 4.4.4 Process Indicator Assessment The Mid Term Report identified the key environmental, social and economic trends in Mercosur and showed that many of these trends are associated with the long term process of economic growth and development. Economic, social and environmental trends were also shown to be related to the external developments in international trade and investment, associated with increasing globalisation. To the extent that trade liberalisation in the automobile sector counters or reinforces these processes of change, this may have significant long term cumulative effects on the sustainability of development in the Mercosur countries. Consistency with Sustainable Development Principles The key principles of sustainable development are taken to be the principles defined in the Rio Declaration on Environment and Development.71 Not all of these are relevant to this study, and the Mid Term Report identified those selected for inclusion in the SIA. These principles are: Principle 8 - reduce and eliminate unsustainable patterns of production and consumption Principle 9 - exchange scientific and technological knowledge, and enhance the development, adaptation, diffusion and transfer of technologies, including new and innovative technologies Principle 11 - enact effective environmental legislation Principle 12 - promote a supportive and open international economic system Principle 14 - discourage or prevent the relocation and transfer to other States of any activities and substances that cause severe environmental degradation or are found to be harmful to human health Principle 15 - the precautionary approach shall be widely applied Principle 16 - promote the internalization of environmental costs and the use of economic instruments, taking into account the approach that the polluter should bear the cost of pollution Principle 20 enable the full participation of women in environmental management and development
71
United Nations, 1992
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Principle 22 - recognize and duly support the identity, culture and interests of indigenous people and their communities, and other local communities
Sustainable Development Strategies For the second of the two process indicators, the assessment examines the effect of the liberalisation scenario in automobiles on capacity to implement National Sustainable Development Strategies (NSDS). The UN Department of Economic and Social Affairs (UNDESA) and OECD have both developed guidelines and principles for preparing national sustainable development strategies, from which a set of criteria has been derived72. Those which are considered to be relevant to trade liberalisation are as follows: Integration of poverty eradication, gender issues, and the short-term and long-term needs of disadvantaged and marginalised groups into economic policy. Integration of the maintenance of sustainable levels of resource use and the control of pollution to maintain a healthy environment into economic policy Participation of stakeholders, including government, decentralised authorities, elected bodies, non-governmental and private sector institutions and marginalised groups Transparent planning processes, with accountability for decisions made. Long-term vision for the countrys development, which is consistent with the countrys capabilities, allows for short-term and medium-term necessities, and has wide political and stakeholder support. Realistic analysis of national resources and capacities in the economic, social, and environmental spheres, taking account of external pressures in the three spheres.
The potential impact of EU Mercosur trade liberalisation in the automobile sector, on the sustainable development process indicators, are recorded in Table 4.17 as insignificant. However, the cumulative impact of liberalisation across all sectors is likely to be significant in terms of the process indicators. These cumulative impacts are discussed in detail in the Overall SIA Report.
72
George and Kirkpatrick (2006a)
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Table 4.17: SIA Impacts for Automotive Sector in Mercosur Impact Countries / sectors affected Causal factors Factors affecting significance Potential significance short term Economic Real income Argentina and Brazil (i) assembly Government policy; corporate strategy; global production trends (i) assembly Domestic market conditions; capacity utilisation; response to international competitiveness pressures _ (ii)parts international (ii)parts competition; Response to corporate strategy international competitive pressures Fixed capital formation Argentina and Brazil Investment climate Corporate strategy Complementary policy changes _ Investors perceptions Global trends Labour saving productivity gains _ Competitiveness of domestic production Social Poverty Employment Argentina and Brazil Changes in output and investment Argentina and Brazil Changes in investment, output and employment Argentina and Brazil Changes in investment, output and Existing levels of inequality _ Equity Existing levels of wages, gender and regional _
long term
employment Health and Education Argentina and Brazil (i) education Changes in government social expenditure as result of reduction in trade tax receipts Global restructuring and international competitiveness pressures (ii) health Impact of air pollution caused by increased vehicle use Environmental Environmental quality
inequalities (i) education Share of trade tax revenue in total government revenues Firm level decisions of labour upgrading
(ii)health Technological changes Regulatory measures
All Mercosur countries
Scale, technology and composition effects of trade liberalisation
Existing trends in production and consumption Quality of environmental regulation
Natural resources
All Mercosur countries All countries, particularly Brazil
water use and land conservation Growth in demand for soya and sugar based bio-fuels See Table 31 See Table 32
Demand for biofuels Growth in demand for bio fuels
_ _
_ _
Biodiversity
Process SD principles SD strategies
All countries
See Table 31 See Table 32
_ _ _
_ _ _
All countries positive greater significant impact negative greater significant impact positive lesser significant impact negative lesser significant impact
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positive and negative impacts likely to be experienced according to context (may be lesser or greater as above) impact has been evaluated as non-significant compared with the base situation This shows the types of likely significant impacts by country or sector that have been identified in the analysis, grouped under the nine core indicators and two process indicators defined in the methodology. Entries in this column summarise the main factors in the causal chain. An entry in this column indicates potential for either a mitigating or an enhancing measure, or a combination of the two Significance of short and long term impacts.
Column 2
Column 3 Column 4
Column 5 & 6
Greater and lesser significance are defined by the SIA methodology as: - lesser significant impact marginally significant to the negotiation decision, and if negative, a potential candidate for mitigation - greater significant impact significant to the negotiation decision, and if negative, merits serious consideration for mitigation. 4.5 SIA for EU Automobile Sector 4.5.1 Economic Impact Assessment The further opening of the Mercosur automobile market to European automobile companies is likely to increase investor confidence, and reinforce the recent increase of European FDI into the Brazilian and Argentinean automobile sectors. The recent upsurge in investment in the automobile sector has been directed towards production for exports, as part of the global production strategies being followed by the major automobile TNCs. The phased liberalisation of trade is expected, therefore, to facilitate the shift towards increased international competitiveness of the domestic assembly and parts sectors in Brazil and Argentina, and to result in a continued growth of exports from Mercosur to third markets. Automobile exports from Mercosur to Europe are a small proportion of total exports, and the phased removal of EU barriers to Mercosur automobiles is not expected to lead to a significant increase in EU imports from Mercosur. EU exports of automobiles may increase as a result of liberalisation, but the growth will be limited to the more luxury brands and specialists vehicles for which the price elasticity of demand in Mercosur is lower than for popular brands supplied by Mercosur production. With the opening of Central European countries to global markets since 1989, the auto industry in Central Europe is now increasingly integrated into the European industry. Integration between the motor industries of Western and Central Europe has taken two forms. 73 First, there has been an increasing two-way trade in vehicles, in which Central Europe offered both growing domestic markets and low-cost production sites to Western European assemblers (including firms from Japan and North America with operations in Western Europe). Second, a number of export-oriented engine and component plants were built in Central Europe in the 1990s. Car production in the new EU members now accounts
73
Dicken, 2003
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for 9.5% of total EU25 production (UNCTAD, 2006). Employment in automobile sector in EU 15 has declined slightly in the last six years, whereas employment has increased in EU10, reflecting the shift in locational advantage within the EU. The liberalisation of automobile sector trade between the EU and Mercosur is not expected to significantly affect these industry shifts between the EU 15 and EU 10 members. The CETM CGE modelling results for the EU automobile sector predict a small increase in production in EU15 and EU 10 as a result of full liberalisation of EU Mercosur automobile trade (Table 4.18). Table 4.18: EU Automobile Sector Output Changes (%) EU 15 Output changes (including trade facilitation) (%) 1.8 Output changes (excluding trade facilitation (%) 1.8 0.7 0.7 EU 10
The changes in employment in EU15 and EU10 are also predicted by the CETM to be positive and the percentage changes are similar to the predicted changes in output shown in Table 4.18.
The CGE model results are the estimated changes induced by the assumed changes in comparative advantage following full liberalisation. They are based on the assumption that products are homogeneous so there is complete substitutability between vehicles produced in Europe and Mercosur, and make no allowance for the effect on trade liberalisation of past or future investment decisions. The results should therefore be interpreted as providing an indication of whether production and employment might be affected positively or negatively by trade liberalisation, rather than giving a reliable estimate of the order of magnitude of these effects.
The existing trends in European investment to the automobile sector are expected to be determined mainly by macroeconomic stability and business environment in Brazil and Mercosur. Trade liberalisation will signal the governments commitment to a more outward looking export orientated development strategy and therefore reinforce investor confidence. This may result in increased competition between Mercosur and other low cost production locations, including EU10, for TNC FDI into the automobile sector. The short run effect of trade liberalisation on output and employment in the EU automobile sector are unlikely to be significant. In the long run, the effects of the more open market and a reduction in trade facilitation costs, combined with rising consumer income levels in Mercosur, may lead to an acceleration in the growth of EU vehicle exports to Mercosur. 4.5.2 Social Impact Assessment The liberalisation of trade in automobiles between EU and Mercosur is not expected to have significant social impact in the EU member states. 4. 5.3 Environmental Impact Assessment Legislation to control noxious emissions from industrial production and from automobile engines has been increasingly stringent in the EU in recent years. Given the effective
enforcement of environmental standards and controls within the EU, any additional environmental pressures within the EU caused by the liberalisation of automobile trade between EU and Mercosur are unlikely to be significant. 4.5.4 Process Impact Assessment The automobile sector can have significant impacts on long run sustainability trends, particularly in relation to emissions and global warming. These potential impacts are now integrated into public policy analysis, and are increasingly been implemented in flanking policy measures at the EU level. The additional impact on the sustainable development process indictors that can be attributed to the liberalisation of EU Mercosur trade in automobiles is unlikely to be significant in itself, but is a key part of a systemic approach to sustainability policy. The significance of the potential economic, social and environmental impacts of EU Mercosur trade liberalisation in automobiles are shown in Table 4.19.
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Table 4.19: SIA Impacts for Automotive Sector in EU Impact Countries / sectors affected Causal factors Factors affecting significance Potential significance short term Economic Real income EU members where automobile production is concentrated Removal of tariff and nontariff measures on exports to Mercosur Growth in income levels and shift in market preferences in Mercosur Globalisation strategies of EU firms Fixed capital formation All EU states Liberalisation of investment and trade flows; improvement in investment climate; reduction in trade facilitation costs Removal of tariff and non tariff measures Global locational shifts in FDI in automobile sector Employment Particularly in new member states _ Social Poverty Health and education Equity Environmental Biodiversity Environmental quality Natural resources Process SD principles SD strategies No significant impacts No significant impacts No significant impacts No significant impacts No significant impacts No significant impacts High consistency Part of existing systemic approach SIA of Mercosur Negotiations Automobiles Final Report page 68
long term ? ?
5.MITIGATION AND ENHANCEMENT MEASURES 5.1 Introduction The analysis of mitigation and enhancement measures is an integral part of the SIA methodology and on the basis of the impacts identified in the assessment, an SIA should propose measures in different areas of public policy, including trade policy, which can enhance the effect of potential positive impact and mitigate the potential negative impacts. Measures can be taken through trade-related measures within the negotiation framework, such as adjustment to the timing and phasing of trade reforms, through reforms within the EU, domestic reforms in Mercosur and in the individual Mercosur countries, and by means of EU Mercosur cooperation programmes. The EU SIA Handbook defines the purpose of the mitigation and enhancement analysis in the following terms74: The idea is to assess how best to define a full package of domestic policies and international initiatives to yield the best possible outcome, not just in terms of trade liberalisation and economic growth but also of other components of sustainable development. A Trade SIA should also provide guidelines for the design of possible accompanying measures. Such measures may go beyond the field of trade as such and may have implications for internal policy, capacity building or international regulation. Accompanying measures are intended to maximise the positive impacts of the trade negotiations in question, or to reduce any negative impacts. Given the multiple cross cutting linkages and interrelationships associated with the impact of trade liberalisation on sustainable development it is necessary to develop an integrated set of mitigation and enhancement (M and E) proposals that covers all affected sectors and each of the dimensions of sustainable development. This cross-cutting analysis is presented in the Final Overall EU-Mercosur Trade SIA report which accompanies this automobile sector SIA. Thus, while the flanking measures discussed in this report are focused primarily on the auto sector, they should be considered as part of the more comprehensive set of measures that are discussed in the Overall SIA Report. The assessment in Section 4 indicated that a phased introduction of trade liberalisation in the automobile sector was not expected to have major short term negative effects on the main economic, social or environmental indicators of sustainable development .in Mercosur or in the EU. However, the causal chain analysis highlighted the longer term challenges facing the automobile sector in Mercosur and in the EU, if the sector is to compete successfully in the global economy. The proposals for mitigation and enhancement measures discussed below are intended therefore, to provide the key building blocks for a holistic or joined up policy framework which will allow the automobile sector in Mercosur, and in the EU, to meet these longer term challenges. The automobile sector operates on a global basis and an increasing share of the future market growth for the vehicles produced in Mercosur and the EU will come from extra- EU Mercosur markets, rather than from the EU and Mercosur markets themselves. This underlines the
74
EC, 2006
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importance of identifying measures that will strengthen the capacity of the industry in both regions to compete in markets outside Mercosur and Europe. The environmental consequences of the continued growth of the automobile sector also extend beyond the boundaries of the proposed trade agreement between the EU and Mercosur. Effective regulation and control of CO2 emissions for motor vehicles is an issue of global importance and one where cooperation between the EC and Mercosur countries can potentially yield significant mutual gains not just to the two regional partners but also as part of an international response to the challenge of climate change. 5.2 Industrial Policy for International Competitiveness and Growth Historically, industrial growth has been the primary driver of economic growth, and the rapid spread of economic globalisation has confirmed the role of manufacturing, particularly of exports, as an engine of growth, especially in developing and emerging economies. It is also the case, however, that sustained growth is increasingly dependent on knowledge creation and diffusion, of technological change and on product adaptation. It is the ability of an economy to internalise the role of technology and innovation that determines the economys capacity to compete in the global economy and thereby ensure long term growth and development. Economic thinking on industrial policy has shifted over time. In earlier times, the prevailing orthodoxy highlighted the role of industrial planning, with government playing a strong interventionist role in directing the pattern of investment into targeted strategic activities. With the rise of market orthodoxy, much less attention was given to planned industrial development. The market reform orthodoxy emphasises the importance of creating the right economic fundamentals macroeconomic stability and an enabling environment as the critical determinants of economic growth. International openness plays a central role in the market reform model, allowing the principle of comparative advantage to direct resources to where their contribution to national product is maximised. A major weakness in the market reform approach to economic growth is its failure to recognise the significant externalities that are associated with the expansion of manufacturing activities. This is particularly serious in relation to technology and innovation. The new growth theory highlights the role of technological and learning externalities generated by private investment in human and physical capital to the growth process. Entrepreneurs who make investments in non-traditional economic activities provide demonstration effects for prospective new entrants, train labour and management with skills that are transferable to other firms, and generate technological learning that cannot be fully appropriated in their own business.75 The production of non-traditional exports is an important source of learning and productivity externalities or spillovers. This has important implications in the context of trade liberalisation policy. In the standard static general equilibrium analysis of trade liberalisation, the removal of import tariffs releases resources from import competing industries for use elsewhere. Assuming full employment and balanced trade account, the resources shift to the production of exports. The composition of the increased supply of exports will reflect the existing pattern of exports and the elasticity of supply of exportable commodities. The result is an increase in traditional exports, which in the case of a developing country are likely to be agriculture or natural resource based. The
75
Rodrik (2007), Dahlman (2007)
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message of the new growth theory, however, is that the expansion of non-traditional exports is the source of the learning externalities that drive the growth process. As a result, trade liberalisation, in the absence of public policy intervention, could result in export growth but little economic growth overall.76 A qualification to this argument can be made in terms of the potential positive impact that import liberalisation can have on productivity, by subjecting domestic producers to the discipline of competing with imports. This argument has some validity (and supporting empirical evidence), but it does not address the fundamental issue of diversification and development of non-traditional export growth which is seen to be the key driver for growth. The implication is that sustained economic growth requires a strategic industrial policy which aims at encouraging innovation, adaptation and development of new products for the global market. This need not involve governments in picking winners and subsidising them with tax incentives or directed financial support. Rather, industrial policy can be designed as a process of public and private interaction which identifies the existing blockages to the development of new products and markets and propose solutions to them, which may require public intervention measures.77 As Rodrik (2007: 23) puts it, Industrial policy requires the government to take an ex ante stand neither on the activities to be promoted nor on the instruments to be deployed. It simply requires it to build the public private institutional arrangements whereby information on profitable activities and useful instruments of intervention can be elicited. The automobile industry is the largest sectoral R&D investor world wide and for global vehicle manufacturers high levels of sustained R&D investment are a pre-requisite for retaining competitiveness. The CARS 21 Group identified identified Industry-led Technology Platforms as playing an important role in identifying research needs. Areas for research collaboration include both incremental research (eg technologies for clean and energy efficient thermal engines, integrated safety systems), and breakthrough technologies (hydrogen and fuel cells, development of rechargeable hybrids, second generation biofuels). There is a long traditional of public private dialogue in the automobile sector in both the EU and Mercosur, which reflects the sectors economic importance. In Mercosur, the automobile sector has been seen as an engine for industrialisation and economic growth and has been the focus of public policy aimed at encouraging industrialisation. This has resulted in a close business-state relationship in the Mercosur automobile sector, particularly in Brazil and Argentina. In Brazil, the formation of the Sectoral Chamber of the Automobile Industry established a tri-partite forum in which the interests of labour, industry and government discussed policy issues relating to the stability and growth of the automobile sector during the first half of the 1990s.78 While the Sector Chambers were discontinued as an instrument of representing sectoral views to government, it established the principle of consultation and engagement by policymakers with sectoral interest groups. This increased the transparency of the lobbying process by focussing on a modernising agenda and away from rent seeking. It also offered labour unions an opportunity to contribute to the discussion of industrial policy issues and to improved labour relations. If the automobile sector in Mercosur is to continue to
See Rodrik (2007) The recent growth diagnostics literature emphasises the need to focus on policy reforms that are essential for growth, as distinct from those that are merely desirable because of efficiency gains (Hausmann, Pritchett and Rodrik, 2005; Hausmann, Rodrik and Velasco, 2006). 78 See Doctor (2007) for a detailed analysis of the role of social pacts in the Brazilian automobile sector.
77 76
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act as a major engine of industrial development and economic growth it will need to ensure that it can compete effectively in terms of costs, efficiency, technological development and product design. Western Europe currently accounts for about a third of global automobiles production and provides employment to more that one million people in the EU. The EU-15 motor vehicles industry (manufacturers and suppliers) represents about 9 percent of the EU manufacturing sector.79 Continued growth of the automobile sector will play a key part in achieving the Lisbon Agenda goals for EU jobs and economic growth. The European Commission is actively engaged in policy formulation in the automobile sector, particularly in the areas of regulatory frameworks for the European industry and the international harmonisation of technical standards. In the EU there is a regular informal dialogue between automobile sector interests and the Commission. There is formal consultation with sector interests groups through the Commissions Impact Assessment procedures for consultation.80 There is a shared interest between European business, labour and policymakers in ensuring that the European automobile sector adapts successfully to the new challenges of competing in global markets. The automobile sector in the EU and in Mercosur will need to operate increasingly on a global basis and much of the demand increase will come from extra-EU and extra-Mercosur markets. As noted in the Commissions recent review of the strategy to reduce CO2 emissions, The extent to which industrial players will be affected in their production costs will depend on their efforts to develop new technologies, promote fuel efficient cars, and also on the measures put in place by competent authorities..to influence consumer demand towards sustainable cars.81 Proposal: It is proposed that the Mercosur Secretariat and the European Commission jointly establish an EUMercosur Automobile Sector Forum with tripartite membership representing the interests of the European Commission, Mercosur, labour and employers. The Forum would provide an institutional framework in which areas could be identified where collaboration would be mutually beneficial to the future growth of the automobile sector. An immediate task of the forum would be to identify the areas for both potential gains (win-win) and trade-offs (winlose) in the ongoing negotiations on an Association Agreement between the EC and Mercosur. This could build on the analysis provided in this SIA, and confirm (or challenge) the SIA findings on the potential impact of an Agreement on output, investment employment, and long run international competitiveness, in the automobile sector in the EU and Mercosur. The following sections discuss a number of specific areas for flanking interventions aimed at ensuring the competitiveness and growth of the automobile sector in Mercosur and the EU. 5.3 Trade Facilitation Trade facilitation has been identified in various fora as an area for trade negotiations where there are potentially large gains to be generated to both parties. In a narrow sense, trade facilitation efforts simply address the logistics of moving goods through ports or more efficiently handling documentation associated with cross-border trade. A broader definition of
79 80
EC, 2007a See, for example, the Impact Assessment for the Community Strategy to reduce CO2 emissions from passenger cars and light commercial vehicles (EC, 2007a) and the Impact Assessment for A Competitive Automotive Regulatory Framework for the 21st Century (EC, 2007b). 81 EC, 2007a: 7
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trade facilitation includes the quality of the transport infrastructure, transparency and professionalism of customs and regulatory environments, as well as harmonization of standards and conformance to international or regional regulations.82 It is claimed that high trade transaction costs have a negative impact on trade performance: companies may suffer from slow and unpredictable goods delivery and direct costs in terms of rent payments and the compliance with strenuous customs procedures. There may also be significant indirect costs related to foregone business opportunities and the need to hold excessively high levels of stock.83 There is a broad consensus that trade facilitation has the potential to contribute significantly to smoother and intensified trade between countries, particularly in terms of eliminating burdensome trade procedures, increasing transparency, improving business opportunities and security, and generally enhancing competitiveness and economic development to the benefit of both the government and the private sector84. An additional gain may come from increased government revenue, through more efficient and reliable tax collection and reduced corruption Trade in both developed and developing countries stands to gain from trade facilitation. Both the country improving its customs procedures and the countries exporting to this country stand to benefit from the efficiency measures. Over the longer term, improved trade facilitation can be expected to have a positive impact on the economys international competitiveness, by facilitating the process of global production networks and transnational operations of multinational companies. Studies on the costs of implementing trade facilitation measures are scarcer. Analysis of such costs is important in designing assistance programs, as priority should be given to the most cost-effective element of trade facilitation. The OECD conducted a series of country surveys in 2004 and 2005 that addressed this issue of particular concerns to developing countries and LDCs member of the WTO. Data on implementation approaches and costs of eleven trade facilitation measures selected among those proposed by WTO members for negotiations was collected in fourteen developing countries.85 While the OECD cost study does not include any conclusive quantitative cost estimates for the measures examined, it provides very useful information on the relative complexity of the various measures examined and some of the major issues associated with their implementation. The study notes that the inter-linkages between various trade facilitation measure require the need for a coherent implementation plan of the trade facilitation measure to be included in the negotiations.86 The total time required to complete import and export procedures in the four Mercosur countries and in the EU is show in Table 5.1.
82 83
OECD, 2005 OECD, 2005 84 Hellqvist (2003), UNECE (2002) 85 OECD, 2004; OECD, 2005c 86 Cited from Duval, 2006
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Table 5.1: Trade Facilitation Costs

Documents for export (number) 7.75 6 7 9 9 5.26 6.9 Time for export (days) 22.5 16 18 34 22 12.52 23.9 29.2 22.2 27.1 10.5 34.4 40.0 Cost to export (US$ per container) 900.5 1470 895 685 552 1072.74 884.8 1,450.2 1,067.5 923.9 811.0 1,236.0 1,561.1 Documents for import (number) 8.75 7 6 13 9 6.91 9.3 10.0 9.5 10.3 5.9 12.5 12.2 Time for import (days) 25.25 21 24 31 25 15.22 25.9 37.1 27.9 35.4 12.2 41.5 51.5 Cost to import (US$ per container) 1159.5 1750 1145 1077 666 1130.35 1,037.1 1,589.3 1,225.5 1,182.8 882.6 1,494.9 1,946.9
Region or Economy
Mercosur Argentina Brazil Paraguay Uruguay EU25* East Asia
Europe & Central Asia 7.4 LA & Caribbean MENA OECD South Asia Sub Saharan Africa 7.3 7.1 4.8 8.1 8.2
- Excludes Cyprus, Luxemburg and Malta. Source: World Bank (2006)
The figures in Table 5.1 show that the costs to export and import (US$ per container) are comparable in the EU25 and in Mercosur, but are significantly higher in both regions compared to the average costs in the OECD countries and in East Asia. This suggests that there are potential gains to be realised in the EU and in Mercosur from a reduction in the trade facilitation costs incurred by exporters and importers. Research undertaken for this report (see Section 4.3.2 above) confirms that trade facilitation costs have had a constraining effect on EU Mercosur trade flows in the automobile sector. Using bilateral data on automobile exports for 2003-04, the econometric analysis shows that trade facilitation costs are a statistically significant explanatory variable of the automobile sector trade performance. Proposal: It is proposed that an impact assessment study be undertaken on the effect of EU and Mercosur trade facilitation costs on the automobile sectors trade performance.87 If the results of the study confirm that on-the-border trade facilitation costs are constraining the growth in
The automobile sector study would be part of a larger study of the effect of trade facilitation costs on EU Mercosur trade. This recommendation is part of the integrated set of flanking measures for EU Mercosur Association Agreement proposed in the Overall Final Trade SIA Report.
87
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automobile exports and imports, a programme of measures to reduce trade facilitation costs in Mercosur and the EU should be formulated. This programme should be based on identified problem areas and should be accompanied by an estimated cost of implementation. In the case of Mercosur, the proposed reform measures could be supported by the EU funding and technical assistance as part of the set of enhancement measures linked to the EU Mercosur Association Agreement negotiations. 5.4 Regulatory Quality In addition to the on-the-border costs which are represented in trade facilitation, there may be additional behind-the-border costs to business resulting from inefficient or unnecessary regulation or from inadequate infrastructure services. There is a growing body of evidence to show that the quality of the regulatory environment has a significant impact on economic growth.88 Regulatory reform is now a priority area for policy reform in many OECD and a growing number of developing countries. Many of the regulatory reform programmes that have been implemented have been based on the assumption that regulatory interventions by government impose a significant and growing additional to the costs of doing business and represent a major barrier to private investment and the growth of the private sector. The World Banks annual Doing Business reports have provided cross country information on the level of regulation costs on business.89 This dataset contains information on time and money spent on bureaucratic procedures and thus gives a consistent account of regulatory efficiency on a cross country basis. Table 5.2: Bureaucratic requirements to start a business
Cost (% GNI per capita) 50.7 12.1 9.9 138.6 42.2 9.6 42.8 14.1 48.1 74.5 5.3 46.6 Min. Capital (% GNI per capita) 47.2 5.6 0 0 183.3 42.3 60.3 53.9 18.1 744.5 36.1 0.8
Region or Economy Procedures (number) Mercosur 14.7 Argentina 15 Brazil 17 Paraguay 17 Uruguay 10 EU25 7.5 East Asia & Pacific 8.2 Europe & Cen. Asia 9.4 Latin America 10.2 MENA 10.3 OECD 6.2 South Asia 7.9 * - Excludes Cyprus, Luxemburg and Malta.
Duration (days) 74.7 32 152 72 43 29.9 46.3 32 73.3 40.9 16.6 32.5
Source: World Bank (2006) Areas of regulatory quality that are widely perceived as being important for potential investors and existing businesses include, the bureaucratic requirements to start a business, the efficiency of contract enforcement regulation, the costs associated with closing a business, and the flexibility of labour regulation. Tables 5.2 to 5.4 give comparative data on these four dimensions of regulatory costs for Mercosur and the EU, and for other regions. As expected,
88 89
See, Jalilian, Kirkpatrick and Parker (2007) World Bank, 2006
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the level of regulatory costs in Mercosur are, on average, higher than in the EU. They are also higher than in East Asia region. Table 5.3: Efficiency of Contract Enforcement Regulation
Region or Economy Mercosur Argentina Brazil Paraguay Uruguay EU25* East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa OECD South Asia Sub-Saharan Africa * - Excludes Cyprus, Luxemburg and Malta. Source: World Bank (2006) Procedures (number) 40 33 42 46 39 25.3 31.5 31.5 39.3 41.6 22.2 38.7 38.1 Time (days) 567.25 520 616 478 655 481.8 477.3 408.8 641.9 606.1 351.2 968.9 581.1 Cost (% of debt) 21.3 15 15.5 38.9 15.9 12.845 52.7 15.0 23.4 17.7 11.2 26.4 42.2
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Table 5.4: Efficiency of Closing a Business

Region or Economy Mercosur Argentina Brazil Paraguay Uruguay EU25* East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa OECD South Asia Sub-Saharan Africa * - Excludes Cyprus, Luxemburg and Malta. Source: World Bank (2006) Time (years) 3.2 2.8 4 3.9 2.1 2.1 2.4 3.5 2.6 3.1 1.4 3.6 2.6 Cost (% of estate) 10 12 12 9.0 7 10.4 23.2 14.3 13.6 12.1 7.1 6.3 16.0 Recovery rate (cents on the dollar) 26.7 36.2 12.1 15.4 43.2 60.1 27.5 29.5 25.7 25.7 74.0 19.5 17.7
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Table 5.5: Flexibility of labour regulation

Region or Economy Mercosur Argentina Brazil Paraguay Uruguay EU25* East Asia & Pacific Europe & Central Asia Latin America & Caribbean Middle East & North Africa OECD South Asia Sub-Saharan Africa Difficulty of Rigidity of Difficulty of Hiring Index Hours Index Firing Index 50 44 67 56 33 33.7 23.7 60 60 60 60 60 55.4 25.2 20 20 0 60 0 39 19.6 Rigidity of Employment Index 43.25 41 42 59 31 42.5 23.0 Non-wage labor cost (% of salary) 20.75 23.0 37.3 16.5 6.3 27.7 9.4 Firing costs (weeks of wages) 79.9 138.7 36.8 112.9 31.2 34.2 41.7
34.2
50.7
37.1
40.8
26.7
26.2
34.0
34.8
26.5
31.7
12.5
59.0
29.7
44.7
32.9
35.8
15.6
56.9
27.0 41.8 44.3
45.2 25.0 52.0
27.4 37.5 44.9
33.3 34.8 47.1
21.4 6.8 12.7
31.3 71.5 71.2
* - Excludes Cyprus, Luxemburg and Malta. Source: World Bank (2006)
The evidence provided by the World Bank Doing Business surveys has a number of serious limitations that need to be addressed before it can be regarded a providing a sufficiently robust evidence base for policy reform recommendations. First, it does not provide information on the costs of regulation at the sectoral or industry level. Second, the evidence relates entirely to the costs of regulation and gives no consideration to the potential benefits of regulation. This omission is particularly serious for the automobile sector where regulation for environmental and safety reasons is widely applied. Nevertheless, the data in Tables 5.2-5.4 are indicative of the costs of regulation to the business community in both regions. The econometric analysis for non-trade determinants of export performance (see 4.3.2) confirms the potential burden of regulation on the automobile sector. Using data for 20032004 on bilateral exports of automobiles, the econometric analysis shows that regulatory costs have a statistically significant and negative effect on export performance.
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The perceived costs of regulation on the automobile sector have also been identified as having a damaging effect on European carmakers competitiveness. The CARS 21 High Level Group convened by the Commission in 2005 represented the key stakeholders of the European automobile industry at the highest level and had the objective to make recommendations for the short, medium and long-term public policy and regulatory employment while sustaining further progress in safety and environmental performance at a price affordable to the consumer. Representations to the CAR21 group by the automobile industry put forward the view that the industry encounters EU rules and procedures which can have an impact on overall competitiveness through potentially creating a high cumulative cost of legislation. Prior to the setting up of CARS 21 the industry suggested that the demands of the regulatory framework could add as much as euro 5,000 to the average retail price of a vehicle. Given the complexity and time involved in planning, development and production of a vehicle, industry also asked the Commission to look into improving the predictability of the overall regulatory framework so as to improve the planning certainty for industry. The ECs Impact Assessment of the CARS 21 Final report concluded that the existing regulatory framework within the EU works reasonably well and that the view held by industry that the automobile industrys competitiveness suffered from the cumulative cost of regulation was not confirmed.90 Rather, the Impact Assessment ( and the CARS 21 report) concluded that the existing EU and UN/ECE legislation in this area was necessary in order to maintain a high level of safety and environmental protection. The Commissions Impact Assessment noted that automobile sector regulation in the EU takes two forms. The first is the body of regulations (more that 100 ) adopted under the auspices of the United Nations Economic Commission for Europe (UN/ECE). The second is the 56 EU Directives which relate to the type-approval of motor vehicles. The CARS 21 Group recommended that 38 of these EU Directives could be replaced by UN/ECE Regulations without any loss in the level of safety and environmental protection. The Commission is of the view that moving towards global technical standards as represented by the UN/ECE regulations would reduce regulatory costs for manufacturers and contribute to the international competitiveness of the automobile industry. Proposal: It is proposed that a detailed assessment of the costs and benefits of regulation affecting the automobile sector should be undertaken for Mercosur and the EU. The study would consider the costs incurred by the automobile sector from regulation but should also consider the benefits that accrue to society at large, from the regulatory measures. For this purpose, the ECs Impact Assessment guidelines can provide a framework for assessing the benefits costs and other effects of regulatory measures. 91 The regulatory assessment would include an assessment of the significance of Mercosur and EU level regulations as a barrier to market entry by Mercosur and EU exports of automobiles, and the extent to which the replacement of regional-level regulations by international automobile technical standards would improve the international competitiveness of the auto sector in both regions. Based on the results of the RIA of automobile sector regulation, a programme of regulatory reform in Mercosur and the EU should be formulated, which aims to remove redundant
90 91
EC (2007b) EC, 2005
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regulatory measures and improve the efficiency and effectiveness of those regulations that are making a positive contribution to dealing with economic market imperfections, environmental protection and human safety and health. 5.5 Environment Related Flanking Measures The assessment of the potential impacts of trade liberalisation in the automobile sector (Section 4) identified a range of environmental effects in terms of air quality, use of natural resources and biodiversity. Each of these impacts can be linked to the problem of climate change and global warming. Because climate change is an externality which transcends national boundaries, it will require an international policy response. As the Stern Report has stressed, this international response must be based on a shared vision of long-term goals and agreement on frameworks that will accelerate action over the next decade, and it must build on mutually reinforcing approaches at national, regional and international level.92 The policy response to climate change will need to be multifaceted, involving market based instruments, regulation, technological innovation, adaptation, and changes in consumption patterns. The automobile sector provides a number of areas where cooperation between the EU and Mercosur could make a significant contribution to the global response that is required to meet the challenge of climate change. The automobile and motor vehicle sector is a major source of carbon dioxide emissions. In the EU as a whole, emissions of greenhouse gases fell by just under 5% over the 1990-2004 period, whereas CO2 emissions from road transport have increased by 26%. Road transport is the biggest transport emission source (94% of domestic emissions) with approximately one third from freight and two thirds from passengers. Road transport relies almost exclusively on fossil fuels, consuming 60% of all oil consumed in the EU.93 In Brazil, the emissions from road transport have risen steadily, by 2.8% per annum over the period 1975 to 2002. However, over the same period Brazil has scaled up the share of biofuels in total road transport from 1% to 25%, which has had the effect of lowering the rate of increase in emissions, which would otherwise have risen at around 3.6% per year. There have also been significant advances made in the automobile sector in Mercosur in the development of engine technology. In 2003, Brazil introduced flex-fuel cars for the domestic market, which can operate on any blend of ethanol and gasoline. By 2006, seven car makers - Volkswagen, GM, Fiat, Ford, Renault, Pergeot, and Citroen - produced flex-fuel cars for the domestic market (some with tri-fuel engines). By early 2006, more than three quarters of new cars sold had flex fuel engines. Both the EU and Mercosur have policies in place to address the environmental impact of motor vehicle use and there is a shared concern to develop an integrated set of policies to mitigate the adverse effects on the environment. This provides a platform for mutually
92 93
Stern, 2007:xv EC, 2007a
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beneficial cooperation between the EU and Mercosur, as part of the Association Agreement negotiations. 5.5.1 Biofuels The biofuels most commonly available as transport fuels are biodiesel and bioethanol (with the latter often converted to bio-ETBE to be used as an additive in petrol). The main feedstocks are crops grown for oil (such as rape, soya and sunflower) for biodiesel, and crops high in sugar or starch ( including sugar beet and cane, various grain crops) for ethanol. Second generation processes are expected to be able to produce a range of synthetic fuels form a wider range of biomass sources, including woody crops and grasses. Brazil has been at the forefront of developing biofuels, based largely on sugar, and accounts for almost 40% per cent of world ethanol production. Brazil is now a major exporter of ethanol and of the technology of bio-fuel production. Biofuels grown in the EU typically offer a 50% reduction in greenhouse gas reduction, compared to an 80% reduction from Brazilian produced ethanol.94 In addition, the costs of producing biofuels in the EU are significantly higher than the costs of imported Brazilian ethanol, despite benefiting from various agricultural subsidies. A further consideration is that the production of biofuels has additional environmental consequences. If electricity from coal is used to convert wheat into ethanol, for example, the benefits in terms of reduction in emissions of carbon dioxide are negligible. Similarly, if rapeseed is grown using fertiliser made from natural gas, the resulting biodiesel brings about a much reduced reduction in emissions or fuel imports. In the case of ethanol production in Brazil, the expansion of land for sugar production can reduce forest cover, with adverse consequences for carbon emissions. Similarly, the conversion of land use from food crops, or the use of wheat for biofuel production rather than foodstuffs, can have consequences for food security and prices. The EU currently has a voluntary target for the use of biofuels of 5.75% has endorsed the proposal that biofuels should make up a mandatory 10% of the EUs fuel consumption by 2020; the current voluntary target is 5.75% by 2010. Furthermore, the Commissions recent review of the biofuels directive has proposed that the directive be revised to allow for the minimum standard for the share of biofuels in 2020 to be 10%, and to ensure that the use of poor-performing biofuels is discouraged.95 The development of the EUs strategy for increased use of biofuels has not been integrated with the Commissions strategy for EU Mercosur trade relations. The EU currently imposes a high tariff on Brazilian ethanol. In addition, in estimating the contribution that increased use of biofuels will make to meeting Europes CO2 reduction targets, Imports of Brazilian ethanol, that represents higher WtW benefits, have not been taken into consideration.96 5.5.2 Fuel Efficiency Technology The EC stategy for reducing emissions from motor transport identifies technical improvements in vehicle fuel consumption as an important component of an integrated approach to achieving a significant reduction in vehicle emissions. There are opportunities for
94 95
TNO, 2006 EC (2007a:26) 96 EC, 2007a:25).(italics added)
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fuel efficency technological improvements in engine design, vehicle air conditioning systems, and vehicle size and weight. The Mersosur automobile sector has accumulated expertise in all of these areas, within the policy framework of the Programme for the Control of Automotive Emissions (PROCONVE) which has resulted in a major reduction in polluting emissions at source since its establishment in 1985. As discussed above, Brazilian manufacturers have been at the forefront to developing flexi-fuel engines. Air conditioning technology has also been refined for the Mercosur market. Finally, the Brazilian automobile sector has developed the compact car which contributes to fuel efficiency in terms of body weight and design. All manufacturers worldwide, will be subject to the EU CO2 requirements that are adopted in the EU, when selling in the European market. Any regulatory measures in terms of vehicle emissions will not disadvantage, therefore, European producers vis a vis producers of vehicles exported to the European market. In terms of European exports, it is likely that the introduction of regulatory measures will promote research and development in the European automobile sector. Given the global shift towards the control of vehicle emissions, the embodiment of technology that reduces CO2 emissions in European exports is likely to improve their international competitiveness in other markets. Proposal: The preceding discussion has highlighted a number of areas where collaboration between the automobile sector and policymakers in the EU and Mercosur could yield significant mutual gains. It is proposed that a EU- Mercosur Working Group on Measures to Reduce CO2 Emissions from Automobiles be established as part of the ongoing discussions on the Association Agreement. The Working Group would seek to identify initiatives that could be taken within the framework of the Association Agreement that would contribute to the mitigation of climate change effects resulting from vehicle use.
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6. CONSULTATION AND DISSEMINATION ACTIVITIES 6.1 Consultation Process Consultation processes are an integral part of the SIA methodology. Consultations with stakeholders have been carried out since the inception of the EU Mercosur SIA programme in May 2006. This process of engagement with stakeholders and interested parties has been conducted by the development of an experts network, website usage, public meetings in Brussels to discuss the Inception and Mid Term Reports, networking with other groups and parties involved in EU and Mercosur trade policy, and dissemination of the project outputs to the research and policy communities through publications and conference presentations. A Civil Society meeting was held on the Inception Report on 18 July 2006 in Brussels, and a report on the consultations is available on the project website. In response to this meeting, a Final Revised version of the Inception Report was submitted on 1 September 2006. The Mid Term report was discussed with interested parties at a public meeting in Brussels on 19th December 2006. The Report was subsequently revised in response to the comments received at the public meeting and also the comments received by email. The comments received and the consultants response were posted on the project website (www.sia-trade.org ). The revised mid term report was distributed on 5th April 2007. The Executive Summary was provided in English, Portuguese and Spanish. Dialogue with stakeholders should cover all the areas of the trade negotiations. The principal mechanism for achieving this is through the experts network database which has been accumulated through the SIA programme. This includes stakeholder organisations and individuals in the European Community member states and Mercosur, including experts with knowledge in a wide range of environmental, social and economic areas. Electronic communication with stakeholder representatives is being supported by the posting of reports and other information on the project website, and through the websites feedback facility and email correspondence with participants. Direct dialogue with stakeholders will continue to be pursued through attendance at international events involving civil society and governmental representatives. The contractor has continued to run the open access website at www.sia-trade.org. The existing database of nearly 1300 stakeholder organisations and individuals was used to distribute electronically an announcement of the commencement of the current phase of the work programme. Details of the dates for completion of the inception, midterm and final reports, and the timetable for consultation on the reports, have been provided. All interested parties, whether individuals or organisations have been invited to participate in the current phase of the SIA programme, using the dedicated email address for comments siatrade@manchester.ac.uk The contractor will continue to respond to the comments received, using the feedbackcomment function that is incorporated in the website to facilitate dialogue with stakeholders and other interested parties. The project website has had over 14,979 visits from November 2006 to May 2007 (see Tables 6.1-6.3).
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Table 6.1: Numbers of visits to the Mercosur website (November 06 May 07)
Per Month Visits November 2047 December 2937 January 2898 February 2057 March 2445 April 2595 May 2309 Total Nov-May 14979
Hits
24481
24205
26927
20356
25428
27256
23220
99967
Consultation
98
100
134
36
368
Table 6.2: Number of times that online reports have been accessed from Nov 06 May 07
Report Inception Report (6 July 2006) Midterm Report (MTR) (November, 2006) November December January February March April May Total Downloads Nov 06- May 07 798
123
79
179
80
124
103
110
185
78
115
83
461
Table 6.3: Access to Revised Overall Mid-Term Report and MTR Sectoral Studies (by language)
Report
Overall Revised MTR (5 April, 2007) Agriculture Forestry Automobile
English
96 235 0 0
Spanish
346 0 98
Portuguese
267 0 0
The contractor has continued to engage in the wider policy debate on issues relating to trade policy analysis, impact assessment and sustainability impact assessment. 6.2 Networking activities Presentation at the Easy-Eco Conference in Saarbrucken Germany, 11-14 October, 2006 on Improving the quality of Sustainable Development Paper presented at International Workshop on the Use of Research in Trade Policy, Buenos Aires, 31 July 1 August 2006-11-15 Evidence presented to UK House of Commons Environmental Audit Committee, 24 October 2006 Attendence at the Mercosur Chair of Sciences Po Working Group on EU- Mercosur Negotiations, EU Mercosur Trade Negotiations: Make or Brake, January 25th 2007, Paris
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Presentations to Trade Assessment Panel, Annual Conference of the International Association for Impact Assessment, Seoul, Korea, 3-9 June 2007
The contractors have continued to disseminate the results of the SIA programme through academic publications. Publications: George C. and C. Kirkpatrick eds. (2006) Impact Assessment for Sustainable Development: European Perspectives and Experience. Colchester, Edward Elgar. George C. and B. Goldsmith eds. (2006) Impact Assessment and Project Appraisal .Vol. 24, December, Special Issue on Trade Assessment and Sustainable Development. George, C. (2007) Sustainable Development and Global Governance. Journal of Environment and Development. Kirkpatrick C. and C. George (2006) Methodological Issues in the Impact Assessment of Trade Policy: Experience from the European Commissions Sustainability Impact Assessment (SIA) Programme. Impact Assessment and Project Appraisal, vol. 24, December. Franz J. and C. Kirkpatrick (2007) Integrating Sustainable Development into European Policymaking: The Role of Impact Assessments. Journal of Environmental Assessment Policy Management, vol.9, no.2, June, pp.120. Franz J. and C. Kirkpatrick (2007) Sustainability Impact Assessment in the European Commission: Quantifying Benefits and Costs. IARC Working Paper. Iwanow T. and C. Kirkpatrick (2007) Trade facilitation, regulatory quality and export performance in developing countries. Journal of International Development. George C., T. Iwanow and C. Kirkpatrick (2007) (forthcoming) EU Trade Strategy and Regionalism: Assessing the Impact on Europes Trading Partners in De Lombaerde P. and Schulz M. eds. The Makability of Regions: An Evaluation of EU Monitoring and Support to Regional Integration Worldwide. Brugge, UNU-CRIS. Kirkpatrick, C., C. George and S. Scrieciu (2006) Trade liberalisation in environmental services: why so little progress? Global Economy Journal, vol. 6, Issue 2 (May) (electronic journal: www.bepress.com/gej/).
Stakeholders are invited to comment on this Consultation Draft Final Report, and comments and suggestions can be sent to the project email address; Sia-trade@manchester.ac.uk
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7. CONCLUSIONS This report presents the results of a project undertaken for the European Commission to provide a sustainability impact assessment (SIA) of the automobile sector, as part of the Association Agreement under negotiation between the European Union and the Mercosur countries. The automobile sector SIA has been carried out in parallel with two other detailed SIAs, for agriculture and the forestry sector. The results of these sectoral SIAs are also incorporated into an Overall SIA of the EU - Mercosur Association Agreement. The report provides the results of the sustainability impact assessment, and an analysis of potential flanking measures. It incorporates the comments received on the earlier Inception and Mid Term Reports which were circulated widely to stakeholders and discussed at consultation meetings in Brussels with civil society. 7.1 Main Findings The SIA analyses the impacts of a postulated trade liberalisation scenario for the automobile sector in the EU and Mercosur, in comparison with a baseline situation without such an agreement. The assessment is based on a liberalisation scenario where tariff and non tariff barriers relating to the automobile sector in Mercosur and the EU are gradually removed over a transition period of up to ten years. For the EU, the economic impacts are expected to be beneficial in terms of output and employment. Foreign investment flows from Europe to the Mercosur automobile sector will be encouraged by the liberalisation of trade and investment, and any accompanying reduction in trade facilitation costs. The distribution of gains from increased output and employment are likely to favour the EU10 countries with automobile production capacity. The investment benefits will accrue to those EU15 countries that have made significant investments in the Mercosur automobile sector over several decades.Economic benefits are expected to increase over time, as trade liberalisation increases the competitiveness and export potential of the automobile sector in Mercosur and increases the returns from European investments. The liberalisation of automobile sector trade is not expected to have significant social impacts in the EU 15 and EU10 countries. The potential environmental impacts in the EU would be related to any change in production that results from the liberalisation of trade with Mercosur, but given the enforcement of environmental standards and controls within the EU, any additional environmental pressures are unlikely to be significant. For Mercosur, the economic impacts of trade liberalisation in the automobile sector are expected to be positive, as increased openness improves the international competitiveness of automobile manufacturing and parts production in Brazil and Argentina. There may be short term pressure on domestic producers, particularly in the parts sector, as they adjust productdesign and productivity to the challenge of competing against imported parts for use in domestic assembly plants. However, with the continued inflow of FDI, the share of exports in total production is expected to increase. Export growth and growth in the domestic market are expected to allow for the continued expansion of output and employment, although this is partly dependent on the continuation of a stable and predictable macroeconomic environment and investment climate.
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The potential social impacts of automobile sector liberalisation are not expected to be significant. Both gender and income inequality are greater in the automobile sector than in many other manufacturing sectors, but trade liberalisation is not expected to result in a significant change in the existing inequalities. The process of product redesign and upgrading induced by trade liberalisation may contribute positively in terms of increasing the skills endowment of the labour force. The environmental impacts will be related to the changes in production levels, changes in vehicle use, changes in trade, and changes in technology that result from trade liberalisation. Environmental quality can be expected to decline with increased production and vehicle use increasing air pollution. Over time, the magnitude of this scale effect is likely to be reduced as cleaner technology is incorporated into production methods and vehicle design and as the share of imported vehicles from Europe increases. The impact on natural resources, including land conversation and water, can be linked to the increase in production of soya and sugar for use in production of bio-fuels. Biodiversity could also be adversely affected by changing agricultural patterns induced by the growing domestic and foreign demand for ethanol. As is the case of social impacts, the incremental environmental impacts attributable to trade liberalisation in the automobile sector is unlikely to be significant. However, considered in the wider context of economy-level trade liberalisation, the cumulative environmental (and social) impacts are expected to become more significant. 7.2 Flanking Measure Proposals The future growth and development of the automobile sector in Mercosur and the EU will depend increasingly on the capacity to compete internationally in extra-regional markets. The proposals for flanking measures are designed to strengthen public-private cooperation within the framework of the proposed EU Mercosur Association Agreement, with the objective of exploiting the opportunities for win-win outcomes that will enhance the international competitiveness and growth of the automobile sector in Europe and Mercosur. It is proposed that the Mercosur Secretariat and the European Commission jointly establish an EU Mercosur Automobile Sector Forum with tripartite membership representing the interests of the European Commission, Mercosur, labour and employers. The Forum would provide an institutional framework in which areas could be identified where collaboration would be mutually beneficial to the future growth of the automobile sector. An immediate task of the forum would be to identify the areas for both potential gains (win-win) and tradeoffs (win-lose) in the ongoing negotiations on an Association Agreement between the EC and Mercosur. This could build on the analysis provided in this SIA, and confirm (or challenge) the SIA findings on the potential impact of an Agreement on output, investment employment, and long run international competitiveness, in the automobile sector in the EU and Mercosur. The proposed EU Mercosur Automobile Sector Forum could initiate detailed study on the following areas for flanking measures. First, an impact assessment study should be undertaken on the effect of EU and Mercosur trade facilitation costs on the automobile sectors trade performance. If the results of the study confirm that on-the-border trade facilitation costs are constraining the growth in automobile exports and imports, a programme of measures to reduce trade facilitation costs in Mercosur and the EU should be formulated. This programme should be based on identified problem areas and should be accompanied by an estimated cost of implementation. In the case of Mercosur, the proposed reform measures could be supported by the EU funding and technical
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assistance as part of the set of enhancement measures linked to the EU Mercosur Association Agreement negotiations. Second, a detailed assessment of the costs and benefits of regulation affecting the automobile sector should be undertaken for Mercosur and the EU. The study would consider the costs incurred by the automobile sector from regulation but should also consider the benefits that accrue to society at large, from the regulatory measures. The regulatory assessment would include an assessment of the significance of Mercosur and EU level regulations as a barrier to market entry by Mercosur and EU exports of automobiles, and the extent to which the replacement of regional-level regulations by international automobile technical standards would improve the international competitiveness of the auto sector in both regions. Based on the results of the RIA of automobile sector regulation, a programme of regulatory reform in Mercosur and the EU should be formulated, which aims to remove redundant regulatory measures and improve the efficiency and effectiveness of those regulations that are making a positive contribution to dealing with economic market imperfections, environmental protection and human safety and health. Third, a study should be undertaken on measures to reduce CO2 emissions from automobiles, as part of the ongoing discussions on the Association Agreement. The Working Group would seek to identify initiatives that could be taken within the framework of the Association Agreement that would contribute to the mitigation of climate change effects resulting from vehicle use, focusing particularly on technology development and transfer opportunities in the areas of biofuels, engine design and emission control technology.
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Guasch, J. and R. Hahn (1999) The costs and benefits of regulation: implications for developing countries. World Bank Research Observer, 14, 1. pp. 137158. Haas, M., A. McAloon, et al. (2006) A process model to estimate biodiesel production costs. Bioresource Technology, 97, pp. 671678. Hausmann R., D. Rodrik and A. Velasco (2006) Getting the Diagnosis Right: A New Approach to Economic Reform. Finance and Development 43 (1) pp. 1215. Hausmann R., L. Pritchett and D. Rodrik (2005) Growth Accelerations. mimeo. Humphrey, J and O. Memedovic (2003) The global automotive industry value chain: what prospects for upgrading by developing countries. Sectoral Studies Series, UNIDO, Economy environment employment: Vienna. IARC (2006). Trade SIA of the Association Agreement Under Negotiation Between the European Community and Mercosur. Inception Report, University of Manchester. IARC (2006a) Update of the Overall Preliminary Trade SIA EU-Mercosur. Mid Term Report, University of Manchester. IDPM (2001) Development of criteria to assess the effectiveness of national strategies for sustainable development. Report prepared for UK Department for International Development, Institute for Development Policy and Management (IDPM), University of Manchester. Ivanow T. and C. Kirkpatrick (2006) Trade Facilitation, Regulatory Quality and Export Performance: A Panel Data Gravity Model Approach. Journal of International Development (forthcoming).
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Jalilian H., C. Kirkpatrick and D. Parker (2007) The Impact of Regulation on Economic Growth in Developing Countries: A Cross-Section Analysis. World Development 35 (1) pp. 87103. Jenkins R. (2004) Globalisation, production, employment and poverty: debates and evidence. Journal of International Development. Kahn, M. (1996) New evidence on trends in vehicle emissions. The RAND Journal of Economics, 27, 1, pp. 183196. Kirkpatrick, C., C. George and S. Scrieciu (2006) Trade Liberalisation in Environmental Services: Why So Little Progress?. Global Economy Journal, vol. 6, no.2. Kirkpatrick, C. and C. George (2006) The influence of the European Unions sustainability impact assessments on multilateral and regional trade negotiations. Working Paper Series 14/2006 IARC, University of Manchester. Kirkpatrick, C. N. Lee and O. Morrissey (1999) WTO New Round: Sustainability Impact Assessment Study (Phase Two Report). IDPM, University of Manchester. Kirkpatrick, C. and N. Lee (2002) Further development of the methodology for sustainability impact assessment of proposed WTO negotiations. Final Report, IDPM, University of Manchester. Kirkpatrick C. and D. Parker (2007) Regulatory Impact Assessment: Towards Better Regulation? Cheltenham, Edward Elgar. Kirkpatrick C. and S. Scrieciu (2006a) Trade Liberalisation and the Environment: Assessing the Evidence. Impact Assessment Research Centre, University of Manchester. Kirkpatrick C. and S. Scrieciu (2006b) Assessing the Poverty Impact of Trade Liberalisation: A Critical Appraisal of the CGE Approach. Impact Assessment Research Centre, University of Manchester. Kume, H. (1998) A poltica de importao no Plano Real e a Estrutura de Proteo Efectiva in: IPEA (ed), A Economia Brasileira em Perspectiva 1998. Rio de Janeiro: IPEA. Kume, H., G. Piani and C. F. Braz de Souza (2000) A poltica brasileira de importao no periodo 1987-98: descrio e avaliao. Second draft, Rio de Janeiro: IPEA. Kunzli, N., R. Kaiser, et al. (2000) Public-health impact of outdoor and traffic-related air pollution: a European assessment. The Lancet, 356, pp. 795801. Laplane, M., and F. Sarti (2002) Costs and Paradoxes of Market Creation: Evidence and Argument from Brazil. Competition and Change, 6, 1, pp. 127141. Laplane, M., F. Sarti, C. Hiratuka and R. Sabatini (2001) Tendencias Recentes do Investimento Direto Estrangeiro na Economia Brasileira. Campinas: UNICAMP.
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Rodrik D. (2007) Industrial development: some stylized facts and policy directions in Industrial Development for the 21st Century: Sustainable Development Perspectives. Department of Economic and Social Affairs, New York, UN. Rose, A. (2004) Which International Institution Promote International Trade. Review of Intentional Economics Vol. 13, No. 4. Shapiro, H. (1994) Engines of Growth the State and Transnational Companies in Brazil. New York, Cambridge University Press. SOBEET (2002) Boletim, vol, no.7, (May). Stern N. (2007) The Economics of Climate Change: the Stern Report. Cambridge, Cambridge University Press. Sturgeon, T. and R. Florida (2000) Globalization and Jobs in the Automotive Industry. A Study by Carnegie Mellon University and the Massachusetts Institute of Technology. A Study by Carnegie Mellon University and the Massachusetts Institute of Technology. Takacs, W. (1991) The high cost of protecting Uruguays automotive industry. Working Paper No. 639, Washington D.C., World Bank. Tigre, P. B., M. Laplane, G. Lugones and F. Porta (1999) Technological Change and Modernization in the Mercosur Automotive Industry. Integration and Trade, vol 78, IDB, Washington. TNO (2006) Review and Analysis of the Reduction Potential and Costs of Technological and Other Measures to Reduce CO2 Emissions for Passenger Cars. Report to the European Commission. Netherlands Organisation for Applied Scientific Research: Delft United Nations (1992) Rio Declaration on Environment and Development. United Nations Conference on Environment and Development (Earth Summit), Rio de Janeiro, June 314. UNCTAD (2005) World Investment Report, 2005. Geneva: UN UNCTAD (2006) World Investment Report, 2006. Geneva: UN Yeats, A. (1996) Does Mercosur Trade Performance raise concerns about the effects of regional trade agreements?. Washington D.C., World Bank. Wang, W., W. Lyons et al. (2000) Emissions from nine heavy trucks fueld by diesel and biodiesel blend without engine modification. Environmental Science and Technology, 34, pp. 933939. World Bank (2006) Doing Business in 2006. Washington D.C., World Bank.
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ANNEX: TERMS OF REFERENCE

Task specifications to Specific Contract No 1 (implementing framework contract No Trade 05-G3-01) This annex specifies the tasks, activities and reporting which will be carried out during this specific agreement. Requirements and timetables defined by the Commission must be strictly respected by the contractor. For information related to the objectives and content of the Trade SIA methodological framework, see the terms of reference of the call for tender of the framework contract. A) Main tasks and services of this specific agreement
This specific agreement 1 should assess how the trade aspects of the Association Agreement could affect sustainable development in the EU and beyond, in particular in the MERCOSUR countries. The aims of this specific agreement are the following: 1) to up date the Overall Preliminary Trade SIA EU-MERCOSUR 2) to conduct three Trade SIAs including Automotives-Motor Vehicles and Agriculture 1) Up dated overall preliminary Trade SIA EU-Mercosur The study will provide an overall assessment of the potential impact on sustainability of the trade aspects for an Association Agreement between the European Communities and Mercosur. The overall preliminary Trade SIA will allow for the cross-sectoral and cumulative impacts likely to result from the implementation of the trade aspects of the Association Agreement between the European Communities and Mercosur as a whole. The assessment will build on the preliminary overview Trade SIA done in 2003. The up dated overall preliminary Trade SIA will be based on an assessment of two scenarios: i.) ii.) a baseline scenario, without agreement a scenario with trade agreement
The overall preliminary Trade SIA will: Draw together the results of the earlier study and complement this with further analysis in order to up date the preliminary overall Trade SIA results in light of the progress made so far in trade negotiations. On this basis, identify, as far as possible in quantitative terms, the likely impacts on the three key areas of sustainability economic, social and environmental development of the different aspects of the proposed EU-Mercosur trade agreement. On the basis of identified impacts, propose mitigation and enhancement measures in different areas of public policy, including trade policy. Identify the generic issues (potential sustainability impacts and policy options for optimising outcomes) which can inform negotiators and policy-makers.
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Evaluate the Trade SIA methodology and identify areas for further development and refinement in future Trade SIAs. Provide proposals for the ongoing monitoring of key sustainability indicators affected by trade liberalisation and for ex-post evaluation of the overall preliminary Trade SIA EU-Mercosur. Contribute to enhancing the dialogue concerning the overall preliminary Trade SIA EU-Mercosur with interested stakeholders, inside and outside of the EU. Produce an SIA-Trade Newsletter and distribute in electronic and paper format. Contribute to the development of a credible international network of Trade SIA experts in other countries and within other international organisations, particularly in relation to Mercosur.
2) Three Sectoral Trade SIAs including Automotive-Motor Vehicles and Agriculture Each of the sectoral Trade SIAs should aim to achieve: An update of the Trade SIA methodology for these sectors and assessment tools to be used. A clear overview of the current trade situation in the three sectors, together with a definition of the options/scenarios to be considered and a clear analysis of causal chain analysis and the mechanisms through which the different options will affect social, economic and environmental areas. An analysis of the expected significance of these impacts for the sector, using appropriate measures and indicators for assessment of impacts and making use of appropriate qualitative and quantitative techniques. Identification cross-cutting links between these sectors and other sectors. Propose preventive as well as flanking measures or other adjustments that would prove effective in tackling any adverse impacts of liberalisation, and/or in promoting its positive impacts, in these three sectors. Contribute to enhancing the dialogue concerning the above Trade SIA with all interested stakeholders: inside and outside of the EU, particularly in Mercosur countries. Contribute to the development of a credible international network of Trade SIA experts through participation in policy debate on Sustainability Impact Assessments with experts in other countries and within other international organisations.
B) Preliminary sustainability assessment of the overall preliminary Trade SIA and of the three sectoral Trade SIAs The aim of preliminary assessment of the trade aspects of the Association Agreement EUMERCOSUR is to present an overview of all the three dimensions of sustainable development (economic, social and environmental) at stake in the trade aspects of the Association Agreement between EU and Mercosur for each of the Trade SIAs to be developed in the scope of this specific agreement 1. Attention should be paid to building a coherent and rigorous assessment framework. This should include quantitative analysis and modelling as set out in the consultant offer for the framework contract No Trade 05-03-01.
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These preliminary assessments should rely on: 1) scenarios and findings delivered by the previous economic and trade analysis; 2) an analysis of the underlying sustainability context (economic, social and environmental context); 3) a clear analysis of the mechanisms through which the different scenarios of the agreement will affect social, economic and environmental areas. The specific preliminary assessments should provide an analysis in the EU at a regional/national and if appropriate sub national (regional, NUTS 2) level with: a preliminary assessment of possible economic impacts of the trade aspect of the Association Agreement between EU and MERCOSUR; the preliminary social, and environmental impacts of the trade aspects of Association Agreement between EU-MERCOSUR with an analysis of the causal chains which identify the significant cause-effect link between a proposed change in trade policy and its social (including gender and poverty), environmental (including all media) and economic impacts. This analysis should as far as possible combine qualitative and quantitative approaches and a wide range of indicators. This analysis should cover all trade-related aspects of each sector, highlighting the potential positive and negative effects on sustainability as well as preliminary reflections on possible complementary measures which such effects require. The main output will comprise: 1) a first identification of key sustainability issues and most potentially-affected social groups and geographical areas; 2) as a next step, proposal of a set of sector studies for study in the next phase of the contract, to be agreed in consultation with the Commission and Civil Society. C) Detailed study of sub-sectors and case studies Sub-sectors will be analysed in detail notably with the help of at least one case study for each sector. This work will include: Quantitative analysis informed by modelling results according to the consultant offer for the framework contract No Trade 05-03-01 as well as qualitative assessments of the impact of potential outcomes in the sub-sector concerned. This work should be undertaken on the basis of case studies and economic, social and environmental analysis (including environmental impact assessment(s), using appropriate methodology, measures and indicators, and making use of both qualitative and quantitative techniques as appropriate. Impacts shall be as much as possible differentiated amongst EU regions (in particular for the weakest regions of the enlarged EU) - NUTS 2 level. Analysis of cross sectoral effects. Suggest possible amendments or adaptations (including phasing in) of the assessed trade measures or new rules whose potential sustainability impacts are expected to be important, taking into account the existing regulatory frameworks and domestic policies.
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Based on the existing regulatory frameworks and domestic policies of the countries/regions under review, suggestions on what complementary measures might be introduced to best address the negative impacts and maximise the positive impact of further liberalisation / changes in rule-making. This should include an assessment of the various options for mitigating and enhancing measures, including those which could be introduced on a domestic or regional level, in international fora, or in other areas of the ongoing negotiation processes. Identify inherent trade-offs where they exist and specify on which basis and principles the choices on measures have to be made (e.g. precaution, prevention, cost-effectiveness, internalisation of external environmental costs, Treaty obligation of a high level of environmental protection).
The consultants shall select an adequate team of local experts to assist them for the geographical case studies. The list of local experts should reflect the three dimensions of sustainable development in a balanced manner. Particular attention should be paid in finding suitably qualified environmental local experts (in Mercosur countries). D) Process and consultation Particular attention should be paid to the involvement of stakeholders, not only from the EU but also from developing countries, in particular Mercosur countries. Recent experience of the Trade SIA shows a deficit of information and consultation both inside and outside the EU and in particular difficulty in involving third country representatives and stakeholders. This need for better local consultation was also confirmed at the Trade SIA seminar organized by DG Trade in Brussels on 6-7 February 2003 (see more information on http://tradeinfo.cec.eu.int/civil_soc/docconsult.php?action=list). Consultation in the EU and abroad is a major challenge which must be met in order for the EUs Trade SIA process to ensure its credibility and legitimacy. The objectives of the consultation process are: a) to ensure a better understanding of the Trade SIA process by society inside and outside Europe; b) to disseminate the Trade SIA methodology, process and results inside and outside the EU. Trade SIA results should also be validated and complemented with opinions from experts in order to improve the analytical work and next steps; c) to contribute to the identification of priority areas and key issues (see previous section); d) to extend the network of Trade SIA expertise. This specific agreement should look at maintaining and strengthening the existing Trade SIA consultation process by which the Commission can ensure transparency of the Trade SIA process and enable civil society and other stakeholders to provide inputs during the study. This will include: Presentations of the inception, mid-term and final reports at public meetings in Brussels.
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Electronic dissemination of the inception, mid-term and final report, using Experts Network and project website. Produce a SIA-Trade Newsletter and distribute in electronic and paper format. Participate in international meetings and consultations on impact assessment, and make oral or written presentations on the Trade SIA Trade methodology and work programme.
E) Composition and competence of the working team of the overall preliminary Trade SIA and of the three sectoral Trade SIAs Before starting the work on this specific agreement the consultant should provide an indicative list which sets up a minimum qualification team for the overall preliminary Trade SIA and for the three sectoral Trade SIAs. F) Working meetings in Brussels The Contractor will be required to attend meetings in Brussels with Commission officials. These will include: working meetings at the launch of both studies, presentations and explanations by the Contractor of work completed, further information from the Commission on negotiating developments and discussion of future work. This will usually entail, as a minimum, one meeting at the start of the specific contract 1 and thereafter one meeting for each phase of the Trade SIAs work (inception, mid-term and final reports), with other meetings arranged on an ad hoc basis as necessary. A set of six working meetings of one day should be foreseen within this specific agreement. The consultant will be asked to draft a complete report for each of these meetings. G) Public meetings The Contractor will be required to participate in public meetings organised by the Commission involving representatives of Member States, the European Parliament and Civil Society. It must present and explain work completed and provide the opportunity for interested stakeholders to provide direct input. This will usually entail a minimum of three meetings (held back-to-back with the meetings with the Commission). The consultant will be asked to draft a complete report for each of these meetings. H) Electronic documentation The Contractor must create and maintain a web-site dedicated to the above SIA project with a link to the DG Trade web-site. All reports, meeting reports, outputs presented to the Commission including the news letter, the list of consultant networks and consultation documents will be published by the Contractor on this web-site. The web-site should incorporate a feedback function allowing all interested parties to provide input and setting up of a forum of discussion to further stimulate the involvement of civil society.
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I) Deliverables i) Content of the reports for each of the four Trade SIAs:
The two first reports (interim and midterm) should aim to describe 1) the state of play of the study and 2) the way ahead and to propose some further developments to be discussed with the Commission. The Commission draw the attention of the consultant to a necessity of transparency in reports which must include all the references, analytical paths needed to understand fully the outcomes and results of the study. Interim report: This interim report will provide the Commission with: An overview of the consultants proposed approach to the study, including a presentation of the conceptual framework of the sustainability assessment analysis. A description of preliminary methodological developments or changes from past studies. A review of literature, list of tools and references to be uses, list of contact in Mercosur countries. A preliminary screening exercise for the key sustainability issues/impacts associated with the trade agreement, based as far as possible on quantitative indicators. A preliminary discussion on the selection of sector specific indicators relevant for this study. Outlines of the contents for both the mid-term and final reports.
Midterm report: The midterm report summarise the work that has been undertaken on the project and its principal outcomes in September. In particular, it will describe: Implementation of the methodology: a summary of the process by which the methodology has been implemented in the case of EU-Mercosur negotiations Information on communication activities: - Creation of the web site and links to other web sites. Number of hits. - Consultations and dialogue with external experts ad civil society: summary of comments and suggestions received (via e-mail, web site comment function, ordinary mail, meetings etc.) and the uses made of these. - Development of network of Trade SIA experts: contacts undertaken, information supplied and comments received. State of play of study underway, outcomes regarding the screening phase, design of sector studies The way ahead to complete the study
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Final report: The final report will entail the following elements ii) The methodology used for the Trade SIA The outcomes and results of the assessment Proposals of flanking measures Communication actions, networking Conclusions References and key sources Timing:
Deliverables for this preliminary, will be produced in accordance with the following timetable: Inception Report July 2006 July 2006 Mid-Term Report November 2006 November 2006 Final Report March 2007 March 2007
Overall preliminary Trade SIA Sectoral Trade SIAs:
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TRADE SIA OF THE ASSOCIATION AGREEMENT UNDER NEGOTIATION BETWEEN THE EUROPEAN COMMUNITY AND MERCOSUR

AUTOMOBILE SECTOR STUDY

15th June 2007

Project website: http://www.sia-trade.org/mercosur Project email address: sia-trade@man.ac.uk

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

IFF IFPRI IISD IMF IMV

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

Figure 2.1: Basic Principles of the Casual Chain analysis

Initial economic impacts influencing relative prices, incentives and opportunities

Changes in the production system

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

Doctor, 2003 Humphrey and Memedovic, 2003 18 EC, 2007b

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

Humphrey and Memedovic, 2003

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

0.4 0.9 6.6 39.2 100 852361

0.4 1.1 6.7 35.4 100 830433

0.8 1.0 5.6 34.4 100 734710

0.9 0.8 5.0 31.2 100 831772

1.5 1.3 3.6 28. 100 1073755

Amann and Vodusek (2004)

SIA of Mercosur Negotiations Automobiles Final Report

Amann and Vodusek, 2004

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

EU25 NAFTA Mercosur Latin America Japan ROW Total

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

Table 4.2: Mercosur Import Tariffs 2006

Pneumatic Tyres (new & old) Source: Taric

SIA of Mercosur Negotiations Automobiles Final Report

Tariff Level Changes

Standards & Technical Requirements

Export Subsidies and Incentives

Non-automatic import licensing

Import Ban on Used Goods

Consular stamping Requirement

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

SIA of Mercosur Negotiations Automobiles Final Report

Bchir, Decreux and Gurin (2001)