EU trade commissioner-designate Maroš Šefčovič has expressed optimism regarding the finalization of the EU-Mercosur free trade deal. During his confirmation hearing on November 4, Šefčovič suggested that a “very fair agreement” could be reached in 2024 after 25 years of negotiations. With Ursula von der Leyen re-elected as President of the European Commission and a favorable climate in South America, it is expected that the EU will actively pursue the agreement despite opposition from the French government and the agricultural lobby COPA-COGECA.
Current state of affairs
The EU and Mercosur (the Southern Common Market comprising Argentina, Brazil, Paraguay, and Uruguay) established the cooperation framework of the deal in June 2018 and the preliminary agreement on the trade component was reached in June 2019. In early 2023, the two blocs agreed on a roadmap to address the remaining trade and sustainable development issues.
European Commission officials recently stated that the two key negotiation points for Brussels during the final stages of the talks are to affirm the Paris Agreement, an international treaty on climate change, as a core element of the deal and to impose binding commitments to combat deforestation.
The agreement in figures
The trade component of the agreement in principle is expected to generate annual tariff savings of more than €4 billion – more than any other EU free trade deal – while creating the world’s largest free trade area, encompassing approximately 750 million people and one-fifth of the global economy.
Under the deal, Mercosur will gradually reduce 91% of its tariffs over a 10 to 15-year period, while the EU will cut 92% of its tariffs within 10 years. Overall, the agreement in principle is balanced and will allow both blocs to increase their exports. Projections by the German Economic Institute (IW) suggest that if the deal is implemented, EU exports to Mercosur could increase by approximately €40 billion by 2040.
The agreement presents an opportunity to boost exports of regional goods and services since Mercosur commodities already benefit from low tariffs. For the EU, it opens up new potential in public procurement and sectors such as machinery, transport, and chemicals – industries that have long been protected by high tariffs in Mercosur countries, particularly in Brazil and Argentina, as shown in Figure 1 below.
Figure 1
Source: Banco de España
The EU is Mercosur’s second-largest trade partner and its leading investor, with an investment stock of €384.7 billion in 2022. According to Eurostat, over 60% of Mercosur’s exports consist of raw materials which were valued at €63 billion in 2022. In contrast, in the same year, approximately 85% of EU exports were industrial goods that totalled €56 billion. Despite these significant figures, Mercosur accounts for just 3% of total EU trade thus indicating potential for growth.
Geopolitical relevance
The agreement carries significant geopolitical weight, particularly in the context of China’s growing influence. Since 2000, the EU’s share of Mercosur’s total foreign trade has dropped from over 31% to just 15%, with China now firmly established as Mercosur’s most important trading partner, according to IWD data. Mercosur maintains a trade surplus of €37 billion with China, as illustrated in Figure 2.
Figure 2
Source: Own elaboration with iwd data.
As Mercosur’s first foreign trade agreement, the deal will provide the EU with a first-mover advantage vis-à-vis other strategic competitors and establish a robust institutional framework for investment and partnerships between the two blocs, experts have noted.
It would also signal the EU’s commitment to its Economic Security Strategy while aligning closely with the Global Gateway initiative, which aims to mobilize €45 billion in EU investments for Latin America and the Caribbean.
The energy and digital transitions will require a significant increase in critical raw materials, making security of supply a major concern for European industry. Mercosur countries are rich in energy resources and critical raw materials such as copper, graphite, nickel, manganese, and rare earth elements. Notably, Argentina holds the world’s third-largest lithium reserves and also has vast copper deposits, while Brazil accounts for 94% of global niobium production, 22% of graphite, 16% of nickel, and 17% of rare earths, the third-largest reserve on the planet.
The agreement is also expected to underpin the European de-risking strategy by providing an opportunity for EU companies to invest in production facilities in a region of like-minded democracies. Mercosur represents a key market for over 60,000 EU companies, many of which have established a strong presence and long-standing operations in South America.
It could drive investment in innovative industries within Mercosur – such as green hydrogen and derivatives – facilitating technology transfer and technical assistance. A notable example is the recent cooperation agreement between Germany and Argentina for the joint exploration and technology transfer of critical raw materials.
Sustainable development
The trade and sustainable development (TSD) chapter of the deal promotes International Labour Organization conventions and the effective implementation of several multilateral environmental and climate agreements signed by the EU and Mercosur countries, namely the Paris Agreement, the Convention on Biological Diversity, and the Convention on International Trade in Endangered Species of Wild Fauna and Flora. It also promotes corporate social responsibility in line with OECD standards and the UN’s Guiding Principles of Business and Human Rights.
Critics, including NGOs and the European Greens, argue that the TSD chapter falls short and that the deal undermines efforts to reduce global emissions and combat deforestation.
However, tariffs on commodities that are linked to deforestation, particularly soybean production, are already low, meaning the agreement is unlikely to have a significant impact on these products. Other sensitive agricultural exports, such as beef, will be subject to quotas, with Mercosur countries allocated a relatively small quota of 100,000 tonnes.
The EU’s anti-deforestation regulation which is expected to come into force by the end of 2024, has been a thorny issue in the negotiations since it could impact 30% of Brazilian exports to the EU. Even if it is delayed, it will eventually apply and may have a positive effect on sustainability.
Trade negotiators are aiming to finalize the deal at the Mercosur summit in Uruguay in early December, but some political challenges lie ahead
The French government aims to delay the agreement and secure concessions amid widespread opposition across the national political spectrum and among farmers. The business lobby, Movement of the Enterprises of France, on the other hand, has continued to support the deal.
If President Emmanuel Macron intends to block the agreement, his government will have to lead a blocking minority – representing 35% of the EU’s population – to prevent its approval at the European Council, but it remains unclear whether Macron has the political will and leverage to pursue that goal. Aside from France, only Austria, Poland, and Ireland have expressed opposition, but together they still fall short of the 35% threshold.
Meanwhile, the Argentine government, which has been a strong proponent of the deal, has recently floated the idea of withdrawing from the Paris Agreement, further complicating the political landscape.
