EU-Mercosur trade deal draws nearer
In these times of geopolitical conflicts and trade tensions, one could easily forget that new trade agreements are still being negotiated. One example is the long-awaited and laboriously negotiated cooperation agreement between the EU and the Mercosur countries (Brazil, Argentina, Uruguay, Paraguay and Bolivia), for which important steps were taken recently. Negotiations on the agreement were launched in 2020. In principle, the trade component (in total, there are three components: the trade component, political dialogue and a cooperation component) of the EU-Mercosur agreement was already approved in 2019, but some remaining points of contention have meant that final approval is still pending. Now, five years later, it seems that the trade deal could at last fall into a final fold. Although even now, significant points of contention and tensions remain. Nevertheless, the parties involved believe that they will be able to finally approve the agreement by the end of 2024. The physical meetings that are scheduled between the negotiators of both blocs, from September 4 to 6, are a positive sign that negotiators are edging closer to finalising the deal.
Points of contention make for difficult negotiations
Negotiations on the trade agreement between the EU and the Mercosur countries have been dragging on for more than two decades and were interrupted several times during this period. In June 2019, the EU and the Mercosur countries (then excluding Bolivia, which did not join Mercosur until 2023) reached an agreement in principle that has not been finally approved to date because of several points of contention, including European companies' fear of dumping, sensitivities around the protection of product names and disagreement over sustainability visions. Early this year, France, whose vote Ursula von der Leyen needed to be re-elected as president of the European Commission, was still exerting pressure to block the agreement. President Macron cited, among other things, the potential environmental damage the agreement would cause, a view shared by the Green coalition in the European Parliament, and the unfair competition EU farmers would face. The farmers' protests early this year, where Mercosur was just one of many grievances, show that the French president is not alone in his concerns about imports of cheap and less regulated agricultural products from South America.
Some sensitivities remain on the Mercosur side as well, including the environmental measures in the agreement. These are seen by some parties as protectionism in disguise. The unrelated EU Deforestation Regulation, which will come into effect next year, adds insult to injury. The regulation requires that products, including cattle, cocoa, coffee, timber and palm oil, placed on the EU market or exported from the EU do not come from land deforested or degraded after 31 December 2020. Many countries, including Brazil, have already indicated that practical implementation of the new regulations is unfeasible and could negate the benefits of the trade agreement for its implementers.
(Preliminary) content of the agreement
The EU-Mercosur agreement aims to boost two-way trade and investment, including by lowering tariff and non-tariff barriers to trade. In addition to the overarching arrangements, specific concessions in the 2019 agreement in principle by Mercosur countries include the elimination of tariffs on wine, chocolate and several other agri-food products, and the establishment of a cheese tariff quota. The interests of European agricultural exporters are also supported by the recognition of some 350 geographical designations of origin, such as for Parmesan cheese. In addition, Mercosur countries promise to eliminate tariffs on 91% of goods imported from the EU. This will have a significant impact on industrial products subject to high tariffs, such as cars and auto parts (tariffs of 35% and 14-18%), machinery (14-20%), clothing (35%) and chemicals (up to 18%).
In turn, the EU promises to liberalize all or part of imports of Mercosur products such as orange juice, instant coffee and fruit, and increase tariff quotas for beef, poultry, pork, sugar, ethanol and other products. Imports from Mercosur of sensitive agricultural products will thus continue to be subject to limitations.
Not just economic implications
There are several reasons why the EU-Mercosur agreement is so important for the EU and the Mercosur countries. First, there is the potential economic impact of the EU-Mercosur trade agreement. In total, the EU exported €56 billion of goods to Mercosur countries in 2023 and imported €54 billion of goods from the region. This makes the EU the second largest trading partner of the Mercosur bloc, a trade relationship that accounted for 16.9% of total merchandise trade and 14.4% of Mercosur (excluding Bolivia) exports in 2023 (see figure 1).1 For the EU, Mercosur (excluding Bolivia) ranked only tenth in the list of export destinations.
The largest export categories from Mercosur to the EU in 2023 were mineral products (29.6% of total exports), food, beverages and tobacco (19.2%) and plant products (17.9%). EU exports to Mercosur were mainly machinery and equipment (26.7% of total exports), chemical and pharmaceutical products (25%) and transport equipment (11.9%). The EU is not only an important export destination, it is also the largest source of foreign direct investment for Mercosur countries.
Other important motives behind the trade agreement lie in the geopolitical and strategic spheres. With the agreement, the EU wants to counterbalance China's growing influence in South America. The Mercosur region has important reserves of critical raw materials for the green transition, including graphite, lithium, nickel, manganese and rare earths and of niobium, a metal used in rockets and spacecrafts.2 By importing more of these strategically important raw materials from Mercosur countries instead of China, the EU hopes to reduce its dependence on China. The trade agreement could also provide additional motivation for EU companies to redirect their supply chains from China to South America. This in turn could result in a welcome influx of investments for the Mercosur countries, many of which are trying to reform their local industries.
Every agreement has winners and losers, and it is important that the losers be heard for the trade agreement to succeed. Losers is a broad term in this context and includes more than just traders and producers of goods and services in the domestic market. Environmental, animal welfare and public health impacts should therefore also be included in the final deal if the agreement is to be a success story.