EU-Mercosur Trade Agreement: the debate infuriates again.

Translated by Valeria D'Alessandro

On June 28th, 1999, the EU and Mercosur, the South American trade bloc composed of Argentina, Brazil, Paraguay, and Uruguay, began negotiating the EU-Mercosur trade agreement. Although negotiations for the creation of the EU-Mercosur Trade Agreement started in 2000, the EU and Mercosur reached a political agreement on their Trade Agreement only in 2019. This agreement has significant economic and political implications for both parties and has already faced considerable political resistance from some groups in their member countries. However, after almost five years, the Association Agreement remains in limbo, and some experts have already stated that this may be a permanent situation. Furthermore, even the most optimistic are concerned that if the negotiations exceed the threshold of 25 years, it will mark the end of an effort that has consumed the careers of many commercial negotiators.

The economic importance of the EU-Mercosur Trade Agreement stems from both the high levels of commercial exchange between the two parties and the ambitious nature of its provisions. Regarding goods, the EU is Mercosur’s second-largest trading partner, accounting for 16.2% of the group's total trade in 2021. EU exports to Mercosur in 2021 amounted to 45 billion euros, while imports were valued at 43 billion euros. The most traded goods included foodstuffs, petroleum oils, medicines, and motor vehicle parts (Eurostat, 2021). Moreover, the EU exported services to Mercosur valued at 17.2 billion euros in 2020, and it was the largest foreign investor in the region, with accumulated investments reaching 330 billion euros by 2020.

The EU-Mercosur Trade Agreement aims to further increase the volume of exchanges and investments between the two parties by reducing commercial tariffs and non-tariff trade barriers and establishing more coherent rules for commerce and investments. The main objective is to harmonize the rules between the two blocs. This will primarily involve Mercosur adapting its norms and regulations to those of the EU, thereby integrating Mercosur companies into the international market more effectively. Overall, this is the widest agreement ever negotiated by Mercosur.

The EU-Mercosur agreement is of enormous dimensions, as the European Union represents 450 million people and Mercosur represents more than 280 million people – including Bolivia, which became an effective member in December 2023. Venezuela's accession was suspended in December 2016 after only four years due to its inability to incorporate norms on trade and human rights into its national legislation. Depending on the metrics used, the new free trade area would account for around 20% of the global GDP. In 2022, bilateral trade relationships amounted to almost 67 billion dollars (63 billion euros) in exports from Mercosur to the European Union and just under 60 billion dollars (56 billion euros) in exports from the European Union to Mercosur.

The emergence of a bilateral trade deficit of the European Union close to 8 billion dollars represents a new challenge for an already troubled negotiation. In 2022, the European Union received not much more than 14% of Mercosur’s exports, with a quarter less of Mercosur’s share at the beginning of the commercial negotiations in 1999. The involvement of China and other countries adds greater strategic significance to this agreement.

Some Europeans believe that cultural and linguistic bonds would have helped maintain a fruitful relationship between the two parties, reinforcing European investments in Mercosur countries. However, in a world where political alliances and balances are increasingly challenging, and economic competition is on the rise, it appears that relationships that were initially weak are becoming less sufficient to sustain ties between countries and groups of countries. Within the groups, especially in Europe, many parties or countries oppose the Mercosur Agreement. Although most countries in both parties recognize the benefits of an agreement and tighter cooperation, they arrive at this conclusion with less intensity than those who are opposed to the negotiated agreement.

On a broader perspective, both parties should be interested in sealing the agreement, as well as the USA. The US has a vested interest in keeping more countries away from China’s influence and closer to the EU’s influence. Additionally, the rapid decline of US commerce in South America (both in general and compared to China) has contributed to some loss on the democratic front. However, this does not mean that the US stands to gain everything from this agreement, as it would still mean losing influence in certain countries. Moreover, some US lobbyists would not benefit from the EU-Mercosur agreement, meaning that the US would end up being marginal losers.

Even if Milei might be mistaken on Mercosur and the Brazilian president sets it aside with his full agenda, Argentina and Brazil are not the only countries in the group. Bolivia, the newest member, has great mining wealth, but its economy is closely related to China’s, as its commercial transactions are conducted in Yuan. Moreover, Bolivia is receiving billions of dollars in investments from Chinese groups and from the Russian company Rosatom, to develop its lithium resources. Uruguay recently signed a comprehensive bilateral trade agreement of 20 years with Mexico and, more recently, with Chile. While other countries in Mercosur could potentially accept Uruguay's interests in promoting its trade agreements with these Central American countries, Uruguay is now openly trying to sign an agreement with China as well. This would be more challenging, and probably impossible, to accept for the other member countries of Mercosur, and in the last few months, Uruguay has faced conflicts with its larger neighboring countries. As Mercosur is encountering numerous obstacles, smaller members choosing a free trade agreement with China could signify the end of the association.

At the moment, the rotating presidency belongs to Paraguay, a country whose president has decided to overlook the negotiations with the European Union. Santiago Peña has called for a quick pivot towards Asia, but unlike Uruguay, not towards China. He won the elections on a platform of maintaining recognition of Taiwan in Paraguay, rather than the People’s Republic of China (PRC).
However, Peña is already under pressure to promote growth, exacerbated by some constitutional turbulence caused by the expulsion of a representative of the opposition. If a predominantly agricultural economy like Paraguay’s does not intend to export to the PRC, which is the largest agricultural market in the world, then Paraguay will need to accede, sooner or later, to other markets. This is the exact moment where the US enters the game with its strategic interests: if Paraguay does not find a way to insert its production and goods into the global market, then the second-biggest economy (after Guatemala) that still recognizes Taiwan might soon need to change its stance. The EU’s market offers the greatest prospects for Paraguay’s agricultural products, but for the moment, it remains out of reach.

The primary concern regarding the EU-Mercosur agreement is the balance between EU Member Countries and the South American members. Hopes for an agreement in December vanished because of Emmanuel Macron. He used climate change as an excuse, even though Brazil had already reduced deforestation in the Amazon Forest by 50% in 2023. Macron's agreement in principle with Mercosur caused anger among many Brazilians, who viewed deforestation as an 'international matter' and sought to find a solution at the G7, where Brazil was not even present. However, the main reason for France to be skeptical, and at times antagonistic, toward the Mercosur Agreement is its agriculture. In 2024, farmers protested all over Europe with a long list of complaints, including the Mercosur Commercial Agreement. The main objective of these farmers is the European Union itself, mainly because it seeks to address pollution and climate change issues and to compel farmers to reduce their greenhouse gas emissions. Farmers also accuse Brussels of favoring price competition not only from Ukraine but also from South America.

Therefore, the EU-Mercosur agreement poses a fundamental question to the European Union about its true nature. This is the second biggest concern. Is it primarily an internal market, with agriculture at its center, or is it more focused on foreign commerce? Fifty years ago, there would have been an obvious answer, because the European Community (EC), the predecessor of the European Union before 1992, was mainly focused on the Common Agricultural Policy (CAP). In 1980, the CAP represented almost two-thirds of the total balance sheet of the EC, while today it represents less than a quarter of the European Union’s. As a result, European farmers are represented by a lobby that, even by Brussels standards, has noticeable access both to the executive and to the legislative branches of the European Union. At this point, the main industrial organism, the Copa-Cogeca, has had decades to refine its opposition to the Mercosur Commercial Agreement. European concerns, particularly regarding the impact of livestock on the Brazilian environment, are not unreasonable at all, but they are also part of a more complicated framework.

The agreement should not only be acceptable to European leaders but also ratified by both the European Parliament – which could oppose commerce in the elections at the beginning of June – and in national and regional parliaments, some of which have already taken a strong contrary position. The involvement of these bodies in the Mercosur Commercial Agreement has even sparked pioneering investigations into the role of parliaments in commercial negotiations. However, the European Union's need for Mercosur's strategic resources, such as Bolivia’s lithium, Argentina’s graphite, or Brazil’s nickel, is strong. This need is particularly pronounced at a time when both the main countries of Mercosur and the EU are reevaluating their dependence on China, and cooperation would help mitigate this risk. Reducing dependence on China for friends and allies of the US in South America and beyond the Atlantic would align with Washington's objectives for both regions.

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