Is Mercosur's External Agenda Pro-Poor?

In 2010, after several years of being stalled, negotiations between MERCOSUR (the Common Market of the Southern Cone) and the European Union (EU) to build a free-trade agreement (FTA) were resumed. This FTA is expected to have an important impact on MERCOSUR economies, especially if both blocs reach an agreement regarding the agricultural sector. This paper analyzes the impact of an FTA between MERCOSUR and EU, with a special focus on distributional impacts on Uruguay. For this we apply an improved version of MIRAGE (Modeling International Relationships in Applied General Equilibrium) with household heterogeneity. The representative agent in the standard version of the MIRAGE model is decomposed into a private and a public agent for all regions, and into a high number of households for Uruguay. Results show that a trade agreement between MERCOSUR and EU would have a significant impact on trade flows between both blocs. MERCOSUR economies would increase agriculture exports to EU and industrial imports from EU. Welfare increases in all countries participating in the agreement but is more pronounced for the two small countries of MERCOSUR: Paraguay and Uruguay. In Uruguay, welfare increases for different categories of households, but the richest households benefit the most. In spite of this, inequality decreases as a consequence of the agreement, and poverty rates decrease throughout the country.