By Lisandra Paraguassu and Anthony Boadle
BRASILIA South American trade bloc Mercosur this week will prepare its counterproposal to a European Union addendum on a long-awaited trade deal before meeting with EU negotiators in August in the hopes of closing the accord by the end of the year, two Brazilian diplomats told Reuters.
Brazil felt targeted by a "side letter" added this year to the trade deal struck in 2019, adding environmental guarantees to the original accord, they said. The government of President Luiz Inacio Lula da Silva, who has made bold pledges of environmental stewardship in contrast to his predecessor, has taken its time to come up with a response.
One diplomat with knowledge of the negotiations said Brazil would seek compensation for the side letter in the form of increased quotas for exports to the EU or reduced quotas for European products sold to Mercosur.
The sources said Brazil would also seek new exceptions to opening government purchases for foreign firms in the health industry, public-sector construction and green technology.
Brazil's Foreign Ministry and the EU declined to comment.
The Europeans drafted the side letter in response to Brazil's far-right former President Jair Bolsonaro, who undercut environmental protections, allowing deforestation to soar. While Lula has overhauled Brazil's environmental policy, European diplomats say the EU still needs guarantees against a relapse.
Brazil fears the addendum could lead to trade sanctions. Its diplomats complain that the new rules go beyond the Paris climate agreement that their country is complying with.
"There are new obligations that are unacceptable. If sanctions are applied, we want other concessions to compensate," the diplomat said, requesting anonymity ahead of sensitive negotiations.
The EU recently passed a law banning six imported products if linked to deforestation, which Brazilian exporters and government officials saw as a protectionist move.
One of the Brazilian diplomats said that new law had muddied the waters by failing to distinguish between legal and illegal deforestation in Brazil, making it more difficult to conclude the trade talks by year-end.
The EU has warned against trying to renegotiate parts of the trade agreement, given that it took two decades to reach an initial deal. Brazilian diplomats say they are seeking to tweak concessions and quotas, so as not to reopen chapters that could stall the whole deal.
A European diplomat in Brasilia said the EU hoped to resume talks in August with the Mercosur counterproposal on the table.
He said a "re-balancing" of concessions, however, would be difficult without reopening chapters of the trade deal.
"The government procurement chapter is not very comprehensive and already includes a lot of exceptions, but okay, let's look at this," he added, noting that the defense industry was already excluded, along with Brazil's state and municipal governments.
On the environmental guarantees irking Brazil's new government, the European diplomat said the EU recognized what Brazil is now doing to protect the Amazon forest.
"But we still need guarantees going forward because we conclude agreements with the country and not with the government that is in office," he said.
For Welber Barral, a former Brazilian foreign trade secretary, there is a window to finalize the accord, which has never had so much support from Brazil's private sector. But ironing out remaining differences could take time.
"To be realistic, concluding it by the end of the year is a very optimistic goal," he said.
(Reporting by Anthony Boadle and Lisandra Paraguassu; Editing by Brad Haynes and Mark Potter)