EU and Latin America would like to get serious about free trade thanks to Trump

Brussels has initiated the ratification process for the trade agreements with Mercosur and Mexico. The chances are good that this will be completed before the end of this year.

by Alexander Busch, Latin America correspondent for Handelsblatt and Neue Zürcher Zeitung

On December 6, 2024, negotiations on the agreement between Mercosur and the EU were concluded. The EU Commission has now set itself the ambitious goal of having the agreement ratified by the end of the year.

To this end, it forwarded the texts of the agreements with Brazil, Argentina, Uruguay, and Paraguay to the governments of the EU member states and the European Parliament.

To ensure that the necessary majority of votes is achieved, the Commission has separated the trade section from the political framework: as a pure trade agreement, it can be adopted by a qualified majority of the member states. This requires the approval of at least 15 of the 27 member states, which together represent at least 65 percent of the EU population. The complete agreement would also require ratification by the parliaments of the member states, which seems highly unlikely.

After a quarter of a century of negotiations, Brussels hopes to finally conclude the agreement, which could create the world’s largest free trade area with more than 715 million people.

The Trump administration’s erratic tariff policy has significantly accelerated the agreement process. This is because both regions are severely affected by the US tariff increases.

Most recently, the EU also made significant concessions to opponents and critics of the agreement. The opponents include France and Poland in particular, but Italy, Austria, and the Netherlands have also repeatedly stated that they are against an agreement with Mercosur.

Farmers in these countries in particular are opposed to an agreement with South American agricultural exporters because they fear for their protected markets. Industry, banks, and service providers in Europe, on the other hand, are largely in favor of the agreement throughout the EU.

However, the EU has now made it clear once again that it will continue to allow only small quantities of Latin American agricultural imports in the future. For example, only 99,000 tons of beef may be imported into the EU annually at a reduced tariff rate of 7.5 percent. This corresponds to 1.5 percent of European consumption. Any quantities exceeding this will continue to be subject to a significantly higher import duty. The same applies to poultry.

In addition, the Commission has promised to analyze every six months whether the agreement is causing market distortions for agricultural goods, such as a drop in prices or an increase in imports of more than 10 percent. Should this happen, there is a safeguard mechanism in place that provides, among other things, for the reintroduction of quotas. In addition, the EU would like to create a fund of €6.3 billion to support farmers who come under pressure as a result of market distortions.

It is not yet certain whether these concessions will be enough to convince opponents. However, Poland and France have indicated that they will no longer oppose the agreement. Italy and Austria still would like to review it.

At the same time, the EU has also presented the ratification agreement for the current agreement with Mexico. This agreement has been negotiated to deepen and modernize the existing agreement.

The geostrategic signal effect of a rules-based agreement for a free trade zone between two economic communities is significant: Brussels would like to show that it is once again in a position to conclude trade agreements. It has not been able to do so for more than six years.

The potential for trade and investment in both regions is also considerable: the EU Commission estimates that the agreement could increase annual EU exports to South America by up to 39 percent (49 billion euros), supporting more than 440,000 jobs across Europe. Particularly great opportunities are seen for the automotive industry, mechanical engineering, and the chemical and pharmaceutical sectors.

The Latin American partner countries are hoping above all for direct investment and loans from Europe in order to become part of the industrial value chains between Europe and Latin America. Mercosur and Mexico have a number of important raw materials, sustainable and conventional energy sources, and human capital to offer.

It is now important that the agreement is also accepted by the Latin American parliaments. In the region itself, reactions to the news from Brussels have been muted so far.

However, Brazil, which dominates Mercosur, has a particular interest in concluding the agreement: Trump has just imposed record tariffs of 50 percent on Brazil. Brazilian industry and agriculture are urgently seeking new foreign markets.