Florian Couveinhes Matsumoto and Sabrina Robert, Professors of Public Law and International Law, have produced for the Veblen Institute an in-depth analysis of the “Rebalancing Mechanism” of the EU-MERCOSUR Free Trade Agreement.
Of the many concerns raised by the current version of the EU-Mercosur Free Trade Agreement adopted on 6 December 2024, those relating to the inclusion of a “rebalancing mechanism” in the chapter on dispute settlement (article XX.4 (b)) are perhaps the most serious. This mechanism was added in response to a request from Mercosur Member States that the EU give them greater policy space for their industrial development. This mechanism raises questions about the risks it may pose to the efforts of the EU and its Member States to address the environmental emergency and, more generally, to reconcile social, economic and environmental issues within the framework of EU trade policy.
1. At this stage, the scope of the rebalancing mechanism in the EU-Mercosur FTA remains unclear. However, it is particularly broad, covering future measures and those already adopted by the lawmaker but not yet fully implemented.
The notion of “measure” is defined by the Agreement in a broad manner and is not limited to measures adopted after the conclusion or entry into force of the Agreement, but includes all measures that have not yet been “fully implemented “by the end of the negotiations (i.e. on 6 December 2024). This definition extends the scope of the Agreement beyond what is usually provided for. It is almost certain that the mechanism can be used against the EUDR, given that the implementation of half of its provisions, relating to the private sector, has been postponed until 31 December 2025 and that its application requires the EC to implement several information and certification systems, etc. Other environmental regulations that are currently under discussion or have already been adopted but require implementing regulations could also be affected. The use of the rebalancing mechanism to challenge the operation of the CBAM is also predictable. Most health and environmental regulatory measures are necessarily progressive, adaptable, and evolving. As a result, identifying the date for their full implementation is tricky and there is a risk that the mechanism could be used against most of these regulations.
2. The mechanism provided for in the current version of the EU-Mercosur Agreement is much less precise than that of GATT or of the Trade and Cooperation Agreement with the United Kingdom (TCA).
A Party to the TCA can react to what it sees as a destabilisation of the trade or investment relationship established by the treaty, due to a change in the regulations of the other Party. However, it only permit reactions based on significant divergences “with respect to labour and social, environmental or climate protection, or with respect to subsidy control”. The use of the mechanism is mainly envisaged for the benefit of the Party that is strengthening its environmental, social or health regulations, and with the aim of protecting its national production from unfair competition arising from the lower standards of the other Party. The TCA also describes in great detail the procedure involving searching for an amicable solution and, failing agreement, recourse to an arbitration tribunal.
In contrast, the mechanism of the EU-Mercosur Agreement is already the subject of disagreement over its interpretation on both sides of the Atlantic. For the EU, the mechanism “only concerns trade effects of measures that the complainant could not have expected when the deal was closed”. On the Brazilian side, the government maintains that the mechanism is intended precisely to counterbalance the implementation of regulations adopted between 2019 and 2023.
3. This mechanism places additional pressure on the regulator, thereby presenting a risk of inhibiting the regulator’s ability to set standards or even compromising its independence.
It applies to measures of any kind that may be adopted after the entry into force of the Treaty, but also to “omissions and legislation that have not been fully implemented by the conclusion of negotiations of this Agreement and its implementing acts”. This gives the Agreement a retroactive effect, which makes it difficult to assess the extent to which the measure could have been anticipated, the core criterion when reviewing the admissibility of complaints in non-violation situations.
In environmental and health protection, the context of growing insecurity requires public authorities to adopt emergency measures, sometimes experimental, innovative and progressive, that have not been anticipated over the long term. The rebalancing mechanism could be an obstacle to the regulatory discretion needed by public authorities to implement effective and efficient protection measures.
On the other hand, the rebalancing mechanism was clearly introduced into the EU-Mercosur Agreement in response to the EU’s tendency towards unilateralism in the face of multilateral inertia. However, the text of the Agreement provides for numerous regulatory cooperation disciplines designed precisely to neutralise this unilateralism (see chapters on SPS, TBT, Transparency, Dialogues; the Cooperation Protocol and the TSD Annex). These disciplines aim to establish an ongoing dialogue between the contracting parties on the development of their respective regulations. They require each Party to pay close attention to the other Party’s assessment of the impact of the regulation on trade or of its environmental or health requirements. Each Party will, therefore, have to take into account the capacities, needs and expectations of the other Party when devising regulations.
Given the importance attached to this cooperative approach under the EU-Mercosur Agreement, it is clear that the reciprocal pressure on regulators is strong. And if, despite all these dialogue mechanisms, a contracting Party were to adopt a unilateral measure that did not take account of the outcome of these dialogues, the rebalancing mechanism could be mobilised. In other words, the potential invocation of Article XX.4 b) adds to this pressure and the risk of the regulator being captured.