13 Feb 2013

EU-Mercosur Trade Relations: Impacts of Exchange Rate Misalignments on Tariffs

Vera Thorstensen / Emerson Marçal / Lucas Ferraz

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The issue of “trade and exchange rate misalignments” is being discussed at the G20, IMF and WTO, following an initiative by Brazil. The main purpose of this paper is to apply the methodology developed by the authors to exam the impacts of misalignment on tariffs in order to analyse the impacts of misalignments on the trade relations between two customs unions – the EU and Mercosur, as well as to explain how tariff barriers are affected. It is divided into several sections: the first summarises the debate on exchange rates at the WTO; the second explains the methodology used to determine exchange rate misalignments; the third and fourth summarises the methodology applied to calculate the impacts of exchange rate misalignments on the level of tariff protection through an exercise of ‘misalignment tariffication’; the fifth reviews the effects of exchange rate misalignments on tariffs and its consequences for the trade negotiations between the two areas; and the last concludes and suggests a way to move the debate forward in the context of regional arrangements.

This working paper was prepared in the context of the CEPS-FRIDE project on the EU-Brazil Strategic Partnership, funded by Gulbenkian Foundation. Vera Thorstensen is a Professor at the São Paulo School of Economics (EESP-FGV) and Coordinator of the Center on Global Trade and Investment (CGTI); Emerson Marçal is a Professor at EESP-FGV and Coordinator of CEMAP and Lucas Ferraz is a Professor at EESP-FGV.