Hot Topics in International Trade - December 2024 - Mercosur-EU – A New Potential Powerhouse in Trade Blocs if Ratified

After 25 years of negotiations, the European Union and the Southern Common Market, commonly known as Mercosur, comprised of Brazil, Argentina, Uruguay, and Paraguay, signed a free trade agreement. I think this, among many more regional deals to come was suddenly expedited due to the anticipated land mines with the upcoming Trump 2.0 administration and trade policy regarding tariffs for all. The official Mercosur-EU trade agreement is one of the largest bilateral free trade agreements in the world and includes a market of over 800 million people and a combined GDP of nearly $22 trillion. The trade volume between the two blocs is projected to be around $100 billion annually, not so competitive with RCEP @ 2.2 trillion in annual volume, or the USMCA @1.8 trillion but the potential is there for rapid growth. I foresee a soon to be diminished USMCA as it may be blown up by 25% tariffs placed on Mexican and Canadian product imported into the U.S. RCEP has China as its primary driver, but it faces tough geopolitical challenges, not to mention, but I will, India opted out.

So, kudos to Mercosur, as the European Union (EU) itself is a huge bloc and has several significant trade agreements currently in place with Latin American countries and regional blocs such as:

1. EU-Mexico Global Agreement

• This agreement modernizes the previous trade deal, enhancing trade in goods and services, and includes provisions on investment, intellectual property, and sustainable development

2. EU-Chile Association Agreement

• This agreement covers political dialogue, cooperation, and trade. It aims to strengthen economic ties and promote sustainable development

3. EU-Andean Community Trade Agreement

• Members: Colombia, Peru, and Ecuador.
• This agreement aims to reduce tariffs, improve market access, and promote sustainable development

4. EU-Central America Association Agreement

• Members: Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, and Panama.
• This agreement focuses on political dialogue, cooperation, and trade, aiming to enhance economic integration and development

However, the Mercosur-EU agreement stands out as discussions between the European Union and Mercosur actually began back in 1999. It would have been ratified then, but if you recall, the world was supposed to end in 2000, so what was the point. Life remaining unclaimed by the apocalypse, and all things exploding that are trade related, there is something to be said about persistence and determination to get this deal in place. Finally, in 2019, the European Commission reached a preliminary agreement with Mercosur countries. Primarily, the arrangement was structured to reduce tariffs on manufactured goods in Mercosur countries while stimulating agricultural trade in the European Union. The farmers represent a sector that has been adamantly protected by European policies for decades. With the farmers dissention, duly noted, the agreement was shelved for years because of opposition from France and other EU countries who also demanded environmental guarantees from Brazil.

Present day, Happy Holidays, on December 6, 2024, a new agreement was signed in Montevideo, Uruguay. A proud accomplishment for many negotiators who stuck with it over the years, some who have since passed I’m sure, this agreement is the largest ever wrapped up by the EU and the only one Mercosur has with a major trading bloc, which translates to European products entering its market under much better conditions than U.S. products. Representative of the opposite of Trump 2.0, it eliminates tariffs on over 90 percent of bilateral trade, saving European exporters EUR 4 billion annually while providing South American products preferential access to European markets, particularly for agricultural goods where Mercosur holds a strong comparative advantage, which worth mentioning again, makes the European farmers very uneasy. The agreement is positioned to make Mercosur’s highly protected market more accessible to European industrial goods. For example, previous tariffs on automobiles, textiles, and machinery ranged from 14 percent to 35 percent. This includes current tariffs on clothing (up to 35%), chemicals (up to 18%), wine (up to 27%), and wow, canned peaches (55%). The high tariffs on the peaches could be due to protecting the local market, subsidies, or even quality standards that must be met.

But wait, that’s not all. Additionally, European companies will be provided better access to Mercosur’s critical raw materials such as Aluminium/Bauxite: Used in aluminum production, Natural Graphite: Essential for batteries and refractories in steelmaking, Niobium: Vital for high-strength steel, super alloys, and high-tech applications like superconducting magnets, Manganese: Important for steel-making and batteries, Silicon Metal: Used in semiconductors, photovoltaics, and electronic components, Vanadium: Used in high-strength low alloys, Tantalum: Used in capacitors for electronic devices and super alloys, and last, but not certainly least, lithium from Argentina. In return, the European Union will reduce tariffs on agricultural products and other goods and contribute $1.8 billion through the global gateway initiative to support Mercosur’s green and digital transition. EU’s Global Gateway is an infrastructure project like China’s Belt and Road initiative that over a six-year span, initiated in 2001, will have spent up to $300 billion by 2027 for sustainable projects.

In the bigger picture, the agreement is structured to increase trade and investment by creating a seamless transactional system with less economical obstacles, primarily by reducing tariff and non-tariff barriers, and promoting growth for small and medium-sized enterprises, which is the foundation for most prosperous economies.

However, standing in the way, Mercosur faces several significant obstacles such as:

1. Political Instability: Divergences between member countries, particularly between Argentina and Brazil, can hinder decision-making and the implementation of policies
2. Environmental Concerns: The EU-Mercosur trade agreement faces opposition due to environmental concerns, particularly from countries like France. These concerns include deforestation in the Amazon and the environmental impact of increased agricultural trade
3. Economic Disparities: There are economic disparities among member countries, which can lead to unequal benefits from trade agreements and economic policies
4. External Pressures: Global protectionist trends and competition from other major economies, such as China and the United States, pose challenges to Mercosur’s economic stability and growth
5. Ratification of Trade Agreements: The recent EU-Mercosur trade agreement, while a significant achievement, still faces a tough battle for ratification due to political and environmental objections

In Mercosur, the agreement must be approved by the national parliaments. If some countries fail to ratify it others may still approve. In the European Union, however, the process is a little bit more complicated. First, the agreement is translated into all EU member state languages. It then gets passed on to the European Council for ratification, where EU countries are represented by their trade ministers. A minimum of four states representing at least 35 percent of the EU population could block the agreement. France, Austria, and Poland have stated that they oppose the agreement, but they would need another large country to reject the agreement at the European Council. Italy could join them, but it is also possible that in the next few months, the guarantees that the European Commission is offering European farmers would be enough to convince the more skeptical countries.

In the meantime, trade with the various countries involved is steady. For example, Argentina’s trade with the European Union includes a variety of goods and services. Key exports from Argentina to the EU are:

1. Agricultural Products: This includes soybeans, beef, and wine. Argentina is a significant exporter of beef to the EU, with quotas and tariffs being adjusted under the new Mercosur-EU trade agreement
2. Raw Materials: Argentina exports minerals and other raw materials to the EU, which are essential for various industries
3. Manufactured Goods: This includes automotive parts and machinery

In return, Argentina imports a range of products from the EU, such as:

1. Machinery and Equipment: This includes industrial machinery, electrical machinery, and transport equipment
2. Pharmaceuticals: The EU is a major supplier of pharmaceutical products to Argentina
3. Chemicals: Various chemical products are imported from the EU for use in Argentina’s industrial sector

EU Exports to Brazil:

1. Machinery and Equipment: This includes industrial machinery, electrical machinery, and transport equipment
2. Pharmaceuticals: The EU is a major supplier of pharmaceutical products to Brazil
3. Chemicals: Various chemical products are exported from the EU to Brazil for use in different industries
4. Vehicles: The EU exports a significant number of vehicles and automotive parts to Brazil

EU Imports from Brazil:

1. Agricultural Products: Brazil exports soybeans, coffee, beef, and orange juice to the EU
2. Minerals and Metals: This includes iron ore and other raw materials
3. Food Products: Brazil exports a variety of food products, including sugar and ethanol

EU Exports to Paraguay:

1. Machinery and Equipment: This includes industrial machinery, electrical machinery, and transport equipment
2. Pharmaceuticals: The EU supplies a significant amount of pharmaceutical products to Paraguay
3. Chemicals: Various chemical products are exported from the EU to Paraguay for use in different industries

EU Imports from Paraguay:

1. Agricultural Products: Paraguay exports soybeans, beef, and other agricultural products to the EU
2. Food Products: This includes products like sugar and ethanol
3. Raw Materials: Paraguay exports minerals and other raw materials to the EU

EU Exports to Uruguay:

1. Machinery and Equipment: This includes industrial machinery, electrical machinery, and transport equipment
2. Pharmaceuticals: The EU supplies a significant amount of pharmaceutical products to Uruguay
3. Chemicals: Various chemical products are exported from the EU to Uruguay for use in different industries

EU Imports from Uruguay:

1. Agricultural Products: Uruguay exports beef, soybeans, and dairy products to the EU
2. Food Products: This includes products like wine and citrus fruits
3. Raw Materials: Uruguay exports minerals and other raw materials to the EU

EU Exports to Bolivia:

1. Machinery and Equipment: This includes industrial machinery, electrical machinery, and transport equipment
2. Pharmaceuticals: The EU supplies a significant amount of pharmaceutical products to Bolivia
3. Chemicals: Various chemical products are exported from the EU to Bolivia for use in different industries

EU Imports from Bolivia:

1. Minerals and Raw Materials: Bolivia exports minerals, including rare earth elements, which are crucial for modern technological products
2. Agricultural Products: This includes products like soybeans and quinoa
3. Food Products: Bolivia exports various food products, including coffee and nuts

An official statement perhaps would emphasize the extensive process of negotiations that took place over more than two decades, with significant progress made since 2023. Both sides participated in 65 rounds of negotiations to address national, regional, and global challenges. The agreement is now ready for legal review and translation, with the aim of ratification in the coming months. This major union highlights cooperation vs the highly unproductive trade wars. Take that USA.