What you need to know about the mammoth EU-Mercosur trade pact

By John Bostwick, Head of Content Management

Last month, representatives from the European Union and Mercosur concluded negotiations on one of the biggest trade deals in history. The agreement covers a combined population of 780 million people and a joint GDP of 19 trillion euros. Over time, it will eliminate over 90 percent of duties on goods traded between EU and Mercosur countries. The two blocs’ current bilateral trade stands at $122 billion a year.

Negotiations concluded exactly 20 years after they'd started. The glacial pace accelerated in recent years for various economic and political reasons. The Wall Street Journal points out that the EU now has a growing sense of urgency, and is “fighting to uphold the postwar, rules-based international order amid rising challenges.” These challenges include the UK’s imminent departure from the bloc, U.S. tariffs, anti-establishment sentiment throughout much of Europe, and China’s “market-distorting policies.”

EU representatives made their motives clear in statements immediately following the negotiations. European Commission president Jean-Claude Juncker said, for example, that “In the midst of international trade tensions, we are sending today a strong signal with our Mercosur partners that we stand for rules-based trade.” Meanwhile, EU trade commissioner Cecilia Malmstrom emphasized that the trade pact was made “in a spirit of cooperation and openness,” and is part of a wider EU effort to foster open trade. The EU has implemented trade agreements with 15 other countries since 2014, which is an impressive rate given the complexities of trade negotiations and approval processes. The U.S. by contrast has made only minor revisions to an existing deal with South Korea — and made still-unapproved updates to the North American Free Trade Agreement — since President Trump took office in 2016.

For its part, Mercosur — which includes Argentina, Brazil, Paraguay and Uruguay — has until now been a trading bloc mostly in name. Bloomberg explains that “free trade has found little traction in the southern flank of the Americas” and that its “rare champions were seen as turncoats in service to flagless neoliberals and carpetbaggers.” The new pact with the EU is a sign that this huge market is finally opening up, or at least poised to do so.

Brazil is the major player in Mercosur, with the largest economy in Latin America and the eighth largest in the world. President Jair Bolsonaro has been called the Trump of the Tropics for among other things his populist style and controversial comments, but there’s at least one big difference between the two leaders: While Trump is implementing protectionist trade policies, Bolsonaro is intent on integrating his country into the global economy. In an address to business leaders at January’s World Economic Forum in Switzerland, he said: “Brazil’s economy is still relatively closed to foreign trade, and to change that situation is one of my administration’s major commitments.” The EU-Mercosur deal is a giant step towards achieving that goal.

Argentina’s president Mauricio Macri had similar motives for accelerating trade negotiations with the EU. Elected in 2015, he like Bolsonaro is pro-globalization and has pledged to open up his country’s economy, which is the second largest in South America. Bloomberg reports that President Macri “fought back tears” after the negotiations, calling the trade pact “the most important agreement ever signed in our history.”

The deal is perhaps just as significant for the other side. The European Commission’s press release notes that the EU is Mercosur’s first major trade partner, and that the new agreement is the largest ever for the EU. The agreement will eliminate 4 billion euros of duties annually for EU-based companies. To put that in context, the EU’s trade pacts with Japan and Canada will eliminate a combined 1.6 billion euros of duties annually for EU companies. That’s just 40 percent of the EU tariff savings to be realized by the EU-Mercosur agreement.

Any trade deal, let alone a deal of this size, is bound to have its opponents. To take a few significant examples: Mercosur countries are, according to Euronews, reluctant to “open up some industrial sectors, such as automotive.” On the EU side, beef producers are worried about untaxed South American imports. The Irish Farmers Association has for this reason “called on Ireland not to ratify the deal.” It's worth pointing out that this kind of local, industry-specific opposition in the EU can be effective. A small band of dairy farmers in Belgium’s Wallonia region, for instance, nearly killed the EU-Canada trade pact.

Other EU players — including French president Emmanuel Macron and the EU farmers’ union Copa-Cogeca — have conflated concerns about the agreement’s potential to destabilize European agriculture with its potential to harm the environment, including increasing deforestation in the Amazon. Macron and three other EU leaders have warned that “meat imports would have to align with the EU’s climate goals.”

Phil Hogan — the EU’s commissioner for agriculture and rural development and one of the chief negotiators of the agreement — addresses these concerns in an Irish Times opinion piece. He says “climate and environmental issues have been climbing steadily up the political agenda … as the negotiations stretched over two decades.” Hogan adds that while many of these concerns are well-founded, “some of the commentary is inaccurate and has, in some cases, been used disingenuously to argue against other aspects of the agreement.” He points out that the trade agreement has an entire chapter devoted to sustainable development, and throughout it affirms that both blocs are committed to implementing the Paris Agreement on Climate Change. Hogan calls for “a rational debate on the facts of the agreement” and concludes by saying “it will be some time before an Irish government has to take a position.”

As Hogan suggests, it’s anyone’s guess as to how long it will take to ratify the EU-Mercosur pact. Both sides must finalize the text of the agreement before it’s submitted for approval to the European Parliament and lawmakers of both blocs’ member countries. The Buenos Aires Times speculates that the revisions will take six months to a year, at which point the agreement will enter into force “provisionally.” That period will be followed by the country- and European Parliament-level approvals “in a process likely to last about another year.”

Whatever the eventual timeline, it’s probably difficult to overstate how significant the EU-Mercosur trade agreement will be, assuming it’s ratified. EU countries could supplant China as Latin America’s biggest trading partner, for example, and Brazil and Argentina in particular could attract considerable foreign investment with the promise of unfettered access to the European market. The agreement is also another sign among many — including China’s Belt and Road initiative and the EU’s recent trade deals with Canada, Japan and other markets — that globalization is thriving in an era of perceived widespread protectionism.