EU-Mercosur Agreement Will Strengthen Blocs' Trade Partnership

The European Commission (EC) and four Mercosur (Southern Common Market) countries, Brazil, Argentina, Paraguay, and Uruguay, have finalized negotiations for a groundbreaking agreement to boost strategic trade and political ties.

The EU-Mercosur agreement on December 6 will secure and diversify supply chains and eliminate tariffs on over 90% of bilateral trade between the two regions. It will save EU businesses €4 billion in duties per year.

The agreement will support the global green transition by securing an efficient, reliable, and sustainable flow of raw materials. It could halt deforestation with €1.8 billion in EU support to facilitate the green and digital transition in Mercosur countries.

Expanding the European Union's trading relationships could mitigate the impact of potential tariffs that US President-elect Trump may impose. With China signaling possible retaliation against Trump's policies, the EU risks being caught in a broader decline in global trade.

"This is a win-win agreement, which will bring meaningful benefits to consumers and businesses," EC President Ursula von der Leyen said in relation to the EU-Mercosur agreement. "This is the reality of an agreement that will save EU companies €4 billion worth of export duties per year."

Trade in goods between the two blocs remains relatively small at €109.4 billion in 2023. The EU is Mercosur's second-largest trading partner behind China but ahead of the United States. Mercosur ranks as the EU's tenth-largest trade partner for goods.

In 2022, the EU exported €28.2 billion to Mercosur in terms of services trade, while Mercosur exported €12.3 billion to the EU. The new trade deal is expected to boost goods trade between the two regions.

Agricultural Sector Opposes EU-Mercosur Agreement

Europe's agriculture industry has opposed the EU-Mercosur agreement. EU farmers, particularly in France and Poland, are concerned about an influx of inexpensive South American imports.

Food and agricultural products constitute the largest share of the EU's imports from Mercosur.

The EC negotiated a preliminary agreement with Mercosur countries in 2019 to reduce tariffs on manufactured goods in Mercosur. It also aimed to open the EU's agricultural sector, which had been long protected by European policies.

However, the partnership deal faced delays due to resistance from France and other EU nations. They demanded stronger environmental commitments from Brazil and expressed concerns about the impact on European farmers.

Food Industry Supports EU-Mercosur Deal

In contrast, some food industry companies are more supportive of the agreement. Confectionery and soft drink manufacturers may benefit from lower input costs. Exporters of European cheese, beer, wine, and spirits welcomed greater market access.

"This milestone is a significant step toward strengthening trade relations and securing a stable, competitive, and sustainable business environment," the Committee of European Sugar Users said.

The European Dairy Association (EDA) said: "So far, dairy trade has mainly taken place within the Mercosur region. The cheese and powder imports from the EU have not reached a significant volume. But this is where opportunities lie."

EU-Mercosur Partnership Will Benefit Green Energy, Car Industries

The EU-Mercosur agreement presents a strategic opportunity for the EU to secure critical raw materials essential for advancing green technologies.

The EU will gain zero-tariff access to Brazilian exports of nickel, copper, aluminum, germanium, and gallium as part of the agreement. These raw materials are crucial for Europe's transition to green technologies.

Currently, EVs are subject to an 18% import tax in Brazil. This is expected to increase to 35% in July 2026 compared to pre-existing EU vehicle import duties of just 10%.

Given the slowdown in the Mercosur economy to 1.8% in 2023, below the global average of 3.1%, South American car markets could provide growth opportunities for European automotive companies.

Germany recently decided to support the Mercosur deal to access new car markets. Germany sees Mercosur as a key market for its auto exports.

High import tariffs have prompted some German manufacturers like Volkswagen Group (VWAGY) and Daimler Trucks (DTRUY) to set up production facilities in Argentina and Brazil. A reduction in tariffs could boost production in Europe.

The demand for lithium batteries is expected to increase. EV battery demand is expected to grow four-and-a-half times by 2030 and almost seven times by 2035 compared to 2023, according to the Stated Policies Scenario (STEPS).

Similarly, the EU’s requirement for rare earth metals needed for wind turbines and EVs is also expected to increase over the same period.

EU-Mercosur Agreement Faces Political Challenge

Despite the finalized negotiations, the EU-Mercosur agreement still needs to be signed off by the 27 EU member states, which is expected by mid-2025.

While France and Poland openly opposed the deal, 11 countries called for its conclusion in a letter to the President of the Commission. They include Germany, Spain, Portugal, Sweden, Denmark, Finland, Croatia, Estonia, Latvia, Luxembourg, and the Czech Republic.

With the agreement set to be sent to the European Council for ratification in the first half of 2025, France, Austria, and Poland said they would oppose it. However, they would need another supporting country to abandon the agreement to reach the 35% of the EU population threshold to block the deal.

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