Mercosur-EU Trade Deal Challenges Protectionism

Twenty-five years in the making, the landmark agreement eliminates tariffs on over 90% of goods while reshaping South America-Europe trade ties. 

A quarter-century after negotiations began, Mercosur, the South American trade bloc whose core members are Argentina, Bolivia, Brazil, Paraguay, and Uruguay, has finally signed a trade agreement with the European Union (EU). The deal runs against the grain in an era of growing protectionism and rising deglobalization.

“This agreement is not just an economic opportunity, it is a political necessity,” European Commission President Ursula von der Leyen said at the Mercosur Summit in Montevideo in December, where the pact was signed. “I know that strong winds are coming in the opposite direction, towards isolation and fragmentation, but this agreement is our near response.”

The deal is the EU’s largest ever and Mercosur’s first with a major trading partner.

“European products will enter [the Mercosur] market under much better conditions than US or Japanese products,” Federico Steinberg, visiting fellow at the Center for Strategic and International Studies in Washington, DC, wrote in a paper published on December 6. By eliminating tariffs on over 90% of goods, the agreement is expected to save EU exporters €4 billion annually while granting South American producers preferential access to European markets for competitive agricultural products.

The agreement has two parts. One covers goods, services, public procurement, and intellectual property, focusing on trade issues such as tariffs, with special attention to automobiles, agriculture, and critical minerals.

“Increasing uncertainties in geopolitics” have sparked interest in rare earth minerals, says Charlotte Emlinger, an economist at the Center for Prospective Studies and International Information (CEPII) in the French prime minister’s office. For sensitive items, such as beef exports to Europe, quotas put a lid on inflows.

The second part of the pact addresses broader themes, including human rights and the environment. Along with another 2024 EU trade pact with New Zealand, it breaks new ground by referencing the Paris Agreement on climate change, a detail notably accepted by Argentine President Javier Milei, a global-warming skeptic.

What Is Mercosur And Why Does It Matter?

With a combined GDP of nearly $3 trillion, the four core members of Mercosur—Spanish for “Southern Common Market” in Spanish—would rank as the world’s fifth-largest economy. Some 300 million people live in an area of nearly 15 million square kilometers. The GDP figure doesn’t include Bolivia, which has been approved for membership but is in a four-year “implementation period” to come fully on board.

The EU was already Mercosur’s second-largest trading partner two years ago for goods, accounting for 16.9% of total trade, trailing China but beating the US, according to the European Commission. The EU exported €55.7 billion worth of goods to Mercosur that year, with €53.7 billion going the other way.

Touted as the emerging EU of the South when it was founded in 1991, Mercosur has yet to evolve beyond an imperfect customs union. The original four added Venezuela in 2012 only to suspend it in 2016 for violating political standards; Bolivia rose to full membership last year.  Suriname, Guyana, Colombia, Ecuador, Panama, Peru, and Chile are associated states; they won’t be formally affected by the EU-Mercosur deal.

Intra-regional trade among the four founders jumped four-fold to $16.9 billion between 1990 and 1996, according to the Inter-American Development Bank, but true integration has proven elusive. Internal trade remained at just 10.3% of the global total in 2022, according to data from the Observatory of Economic Complexity, an online database.

Why Now?

The timing of the deal can be linked to efforts by the EU to ensure continued robust and diversified trade in the face of protectionist measures by the US under US President Donald Trump, the growing role of China, and the demise of the World Trade Organization (WTO) as an effective facilitator of international trade integration.

“In the last few years, the geopolitical situation has become more dire for the EU,” says Maximiliano Marzetti, associate professor of Law, Department of International Negotiation and Conflict Management, Lille Economics Management Lab in France, “with the war in Ukraine, Brexit, and the protectionist and aggressive policies of China and the United States. The EU needs new trade partners in a climate of hostility to free trade and also to assert its relevance on the current multipolar international stage.”

Mercosur-EU negotiations date much further back: to 1999, during the period of “peak globalization,” but they remained in low gear until late in the Obama administration, when the US began taking measures to weaken the World Trade Organization.

All members are far from speaking with one voice, however.

Argentina’s self-described “anarcho-capitalist” President Javier Milei has offered harsh words for Mercosur, even as he begins a one-year stint as the group’s president pro tempore. During a speech at the Mercosur summit, Milei described the bloc as “a prison that prevents member countries from leveraging their comparative advantages and export potential.”

A month later, in Davos during the annual meeting of the World Economic Forum, Milei told Bloomberg that he would abandon Mercosur and its Common External Tariff, which preempts side deals, for an accord with the US. “If the extreme condition were that, yes,” he said. “However, there are mechanisms that can be used, even being within Mercosur.”

Uruguay, too, has been exploring an independent deal with China. But “negotiations never started because of Lula’s vision of Mercosur being together,” notes Bartesaghi.

Nor do these piecemeal agreements solve all the problems. The renewed bilateral deal with the EU will not solve associate member Mexico’s problems if it is hit with higher tariffs from its northern neighbor.

“Remember that the US accounts for 80% of Mexican exports and the EU accounts for less than 5%,” says Ashkan Khayami, senior analyst, Latin America Country Risk at BMI, a British multinational research firm. “It’s not really plausible for the EU to replace the US as kind of the main destination, or even a very significant destination, for Mexican exports.”

What’s Next?

Next comes ratification. For Mercosur, this is straightforward. Legislatures must vote, but if one balks, the accord will still apply for those that approve the deal. In Europe, however, the process is complex both bureaucratically and politically.

Prior to December, French farmers were out protesting the Mercosur deal; a resolution against the deal has been filed in the French parliament. Politicians in Poland, Italy, and the Netherlands, too, are raising questions. But observers tend to chalk this up to domestic posturing.

Thanks to the above-mentioned quotas for beef, for example, “that’s just a hamburger per inhabitant,” says Bartesaghi. Paraphrasing a French colloquial saying, “Mercosur is the tree that hides the forest,” Emlinger quips.

While the EU has sovereignty over trade, other treaty issues need member states’ approval. Proponents may therefore try to split the Mercosur text into its two component parts, trade and other. The trade section could presumably be fast-tracked though the European Parliament, where it would need votes representing 65% of constituents. Other sections, including environmental issues, would take the longer, country-by-country route.

“It is likely that the EU will opt, if it can, to split the ratification process,” says Marzetti.