Latin Analysis: A Step Forward For EU-Mercosur Trade?
Following twenty-five years of negotiations, a trade agreement between the European Union and South American trade bloc Mercosur was finally reached on December 6, creating one of the biggest free trade zones in the world. Mercosur leaders joined by President of the European Commission, Ursula von der Leyen, met in the Uruguayan capital of Montevideo to negotiate and sign this historic deal, “the largest ever concluded by the EU and the only one Mercosur has with a major trading bloc”. A previous draft was drawn up in 2019, but little progress was made in the aftermath due to resistance from certain EU and Mercosur states. Despite this, representatives from Europe, Argentina, Brazil, Uruguay, Paraguay, and Bolivia have once again committed themselves to strengthening the bond between Latin America and the European Union, a relationship that will impact around 770 million people.
The Southern Common Market- or MERCOSUR- was established in 1991 to “promote a common space that generates business and investment opportunities through the competitive integration of national economies into the international market.” The group has trade agreements with nations across the world and a combined GDP of around $3 trillion. In the early stages, the four founding member countries of Argentina, Brazil, Uruguay and Paraguay made significant progress. Previously fractious relations between Argentina and Brazil were improved, there was “a fivefold increase in trade within the group during the 1990s”, and trade deals were made with countries such as India, Egypt and Singapore. Responsible for over 285 million people, Mercosur has additional associate members across the continent, who enjoy preferential trade access without voting rights. Venezuela became one of the more powerful state parties in 2012 but was indefinitely suspended in 2016 after failing to comply with the group’s democratic principles. Bolivia was approved as one of these leading member states this year.
Despite little progress being made in terms of a trade deal over the last two decades, this has not stopped financial flows between the two continents. The EU is Mercosur’s second largest trade in goods partner, accounting for 16.9 per cent of the South American group’s total trade in 2023. Mercosur exported around €53.7 billion to the European Union last year, while the South American states received around €55.7 billion worth of products from Europe. Mercosur exports to the EU are primarily mineral and food products, while Europe sends a significant amount of machinery and automotive products. Agriculture plays a significant role in the trade relationship between these two organizations, with Brazil, Argentina and Paraguay exporting around $24 billion worth of agricultural products- mainly soybeans- to the EU in 2023. This market for South American produce is vital for these economies; in 2021, soybeans made up around 14 per cent of Brazil’s total exports, bringing in around $48 billion. However, agreements regarding this sector have been the main bone of contention of powers in Europe, with French farmers particularly feeling threatened by an influx of Latin American produce.
Mercosur's Biggest Exports to EU in 2023 (% of total)
What does the deal involve?
The agreement reached on December 6- if approved by EU member states- will open doors for both South America and Europe to take advantage of each other’s markets. Estimates project that a deal could “boost the EU’s GDP by EUR 15bn and the Mercosur group’s GDP by EUR 11.4bn.”
Mercosur will facilitate easier EU access to raw materials, allowing Europe to take advantage the rich mineral resources in countries like Argentina and Bolivia. Argentina has vowed to remove all taxes on mineral exports, and although Brazil is planning to maintain certain tariffs on specific materials, the EU will benefit from tariff caps. Increased access to these products will become increasingly vital in the future, with EU demand for lithium batteries to power electric cars expected to increase 12-fold by 2030. Additionally, there is hope that Mercosur opening to the European automotive industry will reap rewards for both continents; South America has a production deficit of around 30 per cent within its car industry, a gap that European countries like Germany are hoping to be able to fill. This will help Mercosur’s automotive industry to grow, while providing Europe with another market to export their cars.
Tariffs will be removed, “granting South American products preferential access to European markets, particularly for agricultural goods where Mercosur holds a strong comparative advantage”. New quotas will be introduced, such as a 180,000 ton poultry quota with zero tariffs, and 99,000 tons of Mercosur beef. Although accounting for only 0.7 per cent of Mercosur’s meat industry, this “opens up new opportunities for shipments to the European market under more favorable conditions than the existing quotas”. In exchange, Mercosur has promised to recognize and protect the Geographic Indicators (GIs) of around 350 European products while EU dairy exports will eventually be tariff free. Overall, the elimination of tariffs for over 90 per cent of exchanges will save European exporters around €4 billion a year.
In order to promote sustainability, the EU pushed for a new article in which all signatories “reiterate their commitment to the implementation of the Paris Agreement” or face suspension. A commitment to end deforestation by 2030 has also been included, with only ‘deforestation-free’ products being allowed to enter the EU as early as 2025. Despite this, many argue that the EU-Mercosur deal does not do enough to protect the climate, but rather will encourage the acceleration of environmentally harmful practices.
How have Mercosur members reacted?
In comparison to the political backlash in Brussels with EU giant France refusing to support the agreement, Mercosur members have had a measured but overall positive response. Brazilian president Lula called it historic, and has managed to guarantee many benefits for Brazil and undo some of what he saw as unacceptable terms of the previous draft. For example, if Brazil perceives that increasing flows of EU products are harming their local industries, they reserve the right to halt or suspend the tariff reduction schedule for at least three years.
Uruguayan president Luis Lacalle Pou- and host of the most recent summit - emphasized how this deal was not a magic solution but rather an opportunity. He acknowledged the ideological differences between the current Mercosur governments, but reminded his counterparts of how building something new is the most difficult thing, not destroying it. Paraguay’s Santiago Peña acknowledged that the deal could be a good development for his country’s small but open economy. However, he reminded his constituents that EU expectations of Paraguay cannot be underestimated, and how currently no one is really “satisfied” with the deal. Argentinian president Javier Milei- newly appointed ‘President pro tempore’ of Mercosur- has been critical of the bloc, stating that what started out as an idea to strengthen commercial and business links, turned into a “prison”. However, he admitted that the opening of new markets is a positive development, but that this time Mercosur’s approach will be more “flexible”.
Where does the greatest opposition lie?
The greatest opposition to an EU-Mercosur deal lies within Europe. France, Italy and Poland remain fierce critics, “condemning an agreement they consider harmful to local farmers, biodiversity, and public health.” French farmers worry that they will not be able to keep up with the increased competition caused by an influx of South American agricultural products, that are often cheaper due to less checks and lower wages for workers. They take issue with the fact that pesticides and GMOs are not regulated to European standards, with Brazilian beef farmers using growth hormones that are banned in the EU. European farmers want ‘mirror clauses’, to subject South American countries to the same standards they comply with. The agricultural lobby will be the biggest obstacle in getting EU approval for this agreement. Commentators think that Von der Leyen may separate the trade aspect of the deal from the political and cooperation sections to get the agreement passed quickly. On their own, the articles referring to trade would not require unanimous approval from EU member states.
Many environmentalists worry that this current agreement will allow South American states to bypass European anti-deforestation laws. Mercosur states left the summit “claiming they had obtained a way to shield themselves from the EU’s upcoming stringent environmental measures”, thanks to the so-called “rebalancing mechanism”. This allows both the EU and Mercosur to adjust tariffs or quotas if they believe the other signatories have implemented an initiative that undermines the agreement. For Mercosur, the EU Deforestation Regulation fits this definition, a law that will expect companies to prove that their exports are not from deforested areas. The EU denies any accusation that their environmental efforts are being undermined, but Greenpeace EU trade campaigner Liz Cunha has argued that this will “increase trade in beef, pesticides and plastics, with disastrous impacts on the Amazon, the climate and human rights.”
Will the deal ever be approved?
The events of December 6 are only the beginning of a very long process for the EU and Mercosur. Aside from the economic benefits, environmental worries and concerns from European farmers, the current global political context has reminded about the importance of bilateral – or multilateral – trade. With Donald Trump’s re-election in the United States and his commitment to increasing isolationism and tariffs, political bodies like Mercosur and the European Union have been forced to rethink trade. Additionally, the growth of China’s influence in Latin America over the last few decades has incentivized Europe to build closer links with their Latin counterparts, to avoid pushing South America even closer to the People’s Republic. However, worrying international developments does not mean that a deal between Mercosur and Europe should be rushed; on the contrary, it is more important than ever that trade deals and political agreements guarantee the protection of the climate, citizens, and their livelihoods.
