An Analysis of A Brazil - EU Free Trade Agreement

In this paper, the potential economic impact of a free trade agreement between Brazil and the EU is investigated. In order to come to conclusions the GSIM model is applied to quantify two different scenarios. The scenarios describe a reduction of bilateral import tariffs by 60% (limited FTA) and by 100% (ambitious FTA). The simulations analyse the effects of liberalization for the economy as a whole and partial effects for the livestock and meat products sector and the motor vehicles sector. A general conclusion is that deeper integration is accompanied with larger welfare, trade, price, output and third country effects. Results indicate that the FTA will bring positive net welfare effects for Brazil in both scenarios. Producer and consumer surplus, trade and output increase while tariff revenue declines. Although tariff revenue declines, the net welfare effect is positive for the economy as a whole, but within the economy there are winners and losers. The partial effects show that the motor vehicles sector only experiences modest improvement while the livestock and meat products sector is a big winner of liberalization. On the other hand the EU is expected to experience positive net welfare effects in the motor vehicles sector in both scenarios while negative net welfare is expected for overall economy wide trade and the livestock and meat products sector under the ambitious FTA. In overall economy wide trade the increase of consumer and producer surplus is totally offset by the fall in tariff revenues. In the livestock and meat products sector fierce competition results in a decline in producer prices and producer surplus. Although the motor vehicles sector is a winner of liberalization, consumers will face increased prices and can be considered as the losers. These opposite effects create conflicting interests resulting in difficult negotiation positions. Negotiation may lead to the adoption of a different tariff reduction than under a limited or ambitious FTA. Besides these changes, third country effects are expected for all other countries in the form of trade diversion and a decline of welfare.