Mercosur FTA: Free Trade, Not A Free-For-All

By Darren Toh, Co-founder of Perlin Network, with over a decade of previous experience as a regulator, federal investigator, and committed conservationist. Darren is also an advisor to a number of other blockchain projects.

After 20 years of stalled negotiations, the EU and Mercosur trading bloc (comprising Brazil, Argentina, Paraguay and Uruguay) have now drafted a historic free trade agreement (FTA). Mercosur is Latin America’s largest trade alliance of states, with a combined GDP of USD $3.4 trillion covering a population of roughly 237 million people (not including numbers from associate members Bolivia, Chile, Colombia, Ecuador, Guyana, Peru, Suriname and the currently suspended Venezuela). 

The ambitious draft agreement, which still requires ratification by all member states, seeks to remove substantial existing tariffs on roughly 90% of exports between the regions. Currently, trade between the regions are finely balanced, with exports from Mercosur to Europe in 2018 amounting to EURO $45B and imports EURO $42.6B. If ratified, the FTA will facilitate substantial new growth in trade between the regions as the largest FTA in the world

However, strong opposition from individual member states may hinder or altogether halt the progress of ratification. European agricultural industry groups, for example, have expressed strong concerns about cheaper imports from Mercosur countries, which may be produced without regard to EU accepted standards for safety and sustainability. 

One very controversial example cited by European agricultural lobby groups is the devastating environmental impact of some Brazilian beef producers clearing Amazonian rainforest (often using fire to raze vast swathes of land) for stock grazing. Rates of deforestation in the Amazon are currently at their highest in recent memory.

Blockchain as the un-blocker for free trade

While the draft FTA devotes special attention to ensuring that trade is based on sustainable principles to address such concerns, there is significant uncertainty around how conditions can be accurately monitored and verified in practice. Existing stringent food safety and environmental protection standards in the EU will continue to operate irrespective of the FTA, which may effectively prevent non-compliant Mercosur imports.

Additionally, the ‘precautionary principle’ of EU states will operate to keep products out of the EU market even if the science on whether they breach EU safety and environmental standards is inconclusive. 

To overcome these obstacles to greater free trade, the parties to the FTA need a means to clearly prove and review with confidence the sourcing of goods to be traded. As part of an important shift to digitalize trade, blockchain technology could usefully be deployed for this very purpose – allowing Mercosur exporters to verify their products are sustainably produced by enabling full value chain traceability.

Such solutions would do much to address European concerns over sourcing while allowing Mercosur exporters to digitally verify that their operations meet EU standards for sustainability, among others.

Combining blockchain with other leading-edge technologies (such as drones, satellite remote sensors, nano sensors and other advancing IoT devices) as ‘data oracles’, will enable multi-factor authentication of data to verify results. This will allow companies, governments, NGOs and research bodies to create a robust picture of how well producers are progressing on sustainability goals in practice, based on objective, independent and verifiable datasets.

Universal standards & global coordination on sustainable standards

Already, many technology providers are currently trying to solve this problem by creating greater transparency for companies using blockchain. However, these providers and their tools are highly fragmented and/or siloed, given the absence of any uniform set of accepted global standards to record and verify compliance with sustainability commitments. This has led to limited adoption and poor visibility on the extent to which commitments are met (or not).

This is where supra-national organizations like the International Chamber of Commerce (ICC) can play a significant coordinating role. The ICC is the world’s largest business organization with 45 million member businesses in 130 countries, which has had a central role in developing and maintaining standards for international trade since 1919. 

Working with leading technology companies, the ICC sees deals like the Mercosur FTA as a prime opportunity to develop and deploy blockchain functionality to monitor and verify sustainable practices across borders. 

The ICC has already helped pilot practical blockchain traceability with major global manufacturers such as Asia Pacific Rayon, one of the world’s largest suppliers of rayon fiber. Its sustainability-focused blockchain initiative, developed by the ICC’s official technology partner Perlin, was launched at Copenhagen Fashion Summit early this year.

Leveraging solutions like the ICC’s, which are based on universally accepted standards and enable interoperability, Mercosur exporters can readily verify that their operations meet EU-accepted standards for sustainability to access the highly lucrative EU market. 

Based on extensive experience developing and upholding global industry standards, organizations like the ICC can help create a trusted and independent framework for transparency on provenance. This would allow both the EU and Mercosur to reassure member nations and constituencies concerned about unfair competition or unsafe products from low-standards exporters.

Such coordinated initiatives can also support future trade to be more accessible, democratized and sufficiently transparent so that growth in global commerce is not at the expense of the long-term sustainable development goals.

The EU and Mercosur have committed to promoting voluntary uptake of responsible business practices for both social and environmental aspects by creating a supportive policy framework. While one of the key objectives of the landmark FTA is to reject protectionism and enhance the free flow of global trade, blockchain can provide vital support for its equally important goal of preserving the environment.

By providing a practical means to strike the right balance, blockchain technology and universal standards could be used to facilitate historically unprecedented levels of access by EU and Mercosur exporters to the others’ substantial markets. 

Digitization and blockchain applications for the future of free global trade

The digitization of trade is not limited to sustainability. Within the EU, a notable opportunity also exists to use blockchain to protect products under the “Geographical Indications” (GI) system, which guarantees that a product is genuinely made in a specific region of origin using ancestral know-how and techniques.

The GI system allows EU producers to obtain a premium price for their products and strengthen their position in the market. The ability to easily and transparently demonstrate product provenance on a trusted and immutable blockchain would provide a distinct commercial advantage to many European businesses. Other such opportunities will present themselves as blockchain technology matures and adoption increases across traditional industries. 

More broadly, enabling traceability of value chains through accurate and reliable digital solutions will be increasingly critical to preserving free trade as regulatory standards are heightened in markets around the world in response to a host of challenges.

The EU-Mercosur trade pact provides an opportunity to demonstrate the benefits digital technologies can have in clarifying the important value chains behind products to be traded. By working to digitalize trade in this way, blockchain can also help make industries adopt future-proofed standards for transparency and sustainability.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.