The effects of the EU-MERCOSUR agreement on bilateral trade: the role of Brexit

The Mercosur and EU countries have a trade affinity due to similarities in consumer preferences (cultural and religious values and common consumption habits) and the existing complementarity in production (distinct climate, North-South hemisphere, and different degrees of added value goods). In this context, this paper evaluates the impact of the EU-Mercosur agreement on the Brazilian economy in terms of gross domestic output, trade, and welfare based on a computable general equilibrium model. To achieve this objective, the method includes two agreement scenario simulations: the first scenario considers the Mercosur-EU agreement including the UK as part of the bloc; in the second scenario, it considers the Mercosur-EU agreement with Brexit. In this way, the scenarios make it possible to analyze not only the gains in trade creation with the formation of the Mercosur-EU agreement but also to identify the effects of trade diversion due to the exit of the UK (BREXIT). For both scenarios, the results point out evidence of the positive effects on trade and the welfare level in Brazil, mainly on manufactured goods and agriculture-grains and crops. The main findings suggest that Mercosur benefits Brazilian trade, making it a strategic partner. Conversely, the paper concludes that Brexit could reduce the Brazilian trade gains from the EU-Mercosur agreement. Comparing the two scenarios, it is possible to observe that the Mercosur-EU gains in the Brexit scenario are smaller than in the alternative scenario. This aspect confirms the hypothesis that there is a negative effect on the Mercosur-EU agreement when Brexit is simulated (scenario 2).