Latin America Advisor

A Daily Publication of The Dialogue

Is There Any Hope for the E.U. Trade Deal With Mercosur?

The Mercosur flag and the EU flag flying next to each other. File Photo: Argentine Government.

The landmark free trade deal between the European Union and the Mercosur trade bloc, which consists of Brazil, Argentina, Paraguay and Uruguay, is on the verge of collapse after Austria announced this month that it will block the agreement out of concern over the deal’s environmental effects. Other E.U. member states and civil society organizations across Europe and South America have also called for the agreement’s disposal. Why are European nations so cautious of ratifying the agreement, and is it likely to be scrapped altogether? What other markets can Mercosur look to as an alternative, and how can the bloc leverage close ties with China and the United States, both of which are enjoying strong economic recovery, to create new trade and investment opportunities? To what extent do member countries have competing priorities, and what collaborative steps can the bloc take to boost regional economic recovery?

Jon E. Huenemann, member of the Advisor board, council member of GLG Inc. and former assistant U.S. trade representative: “The E.U.-Mercosur situation comes as no surprise for longstanding and emerging reasons. An underlying anxiety in the European Union has always surrounded agriculture. The environmental maelstrom regarding the Amazon is another political obstacle. Moreover, E.U. political calendars and trends also complicate matters. I would expect the European Union to position itself by doing what it is doing and pursue more disciplines with Mercosur driven by E.U. politics. That is never easy, no less with emerging agriculture economies at variance with the European Union in their willingness to reorient development to meet E.U. demands. At the same time, Mercosur’s options looking elsewhere for agreements are also not easy. The combination of the U.S.-China dynamic, not to mention the larger global dynamic and Mercosur’s own endless internal meddling, makes a path forward unclear. The good thing is that economic growth in both the U.S. and Chinese ‘engines’ are resuming. Brazil’s interest in building a more formed relationship with the United States is a potential catalyst, but the new U.S. administration and Congress are occupied and have not shown interest in this catalyst. As with the European Union, the politics of agriculture also are vexing, as is climate. A message of Mercosur’s embrace of sustainability/climate and rational economic policy coming from its March summit would be good. However, an overt reach to China in the absence of such a good Mercosur step would raise big questions. In short, we are looking at a wasteland at present of strategic imminent Mercosur trade deals.”

Allison Fedirka, director of analysis at Geopolitical Futures: “The European Union and Mercosur face markedly different geopolitical realities compared to when FTA talks started in 1999. Mercosur never developed into a functional common market that balanced power between Argentina and Brazil. From this perspective, the bloc is defunct. Brazil has outgrown Mercosur; its economy and population now overshadow all others in the bloc. For this reason, Brasília regularly seeks more flexibility for negotiating deals with third parties. Argentina’s economic malaise has prompted it to recoil from free trade, and it removed itself from Mercosur’s future FTA talks last year. Members’ competing interests and regulations greatly restrict Mercosur’s ability to leverage trade and investment opportunities from other places such as the United States and China. The question of environmental effects is the latest of many obstacles that have prevented an agreement over the last 20 years. For the European Union, the Amazon symbolizes a commitment to long-term energy, finance and infrastructure strategies that serve as the foundation for the European Union’s multiannual budget for 2021 to 2027. The European Union is motivated to publicly speak in favor of environmental causes so as not to undermine the bloc’s fundamental strategies. Brazil cannot compromise on the Amazon due to security concerns. How much the European Union needs Mercosur is also in question as Brussels seeks to recover trade ties with the United States. Through it all, the European Union and Mercosur have continued to trade with and invest in one another, and they will continue to do so with or without an FTA.”

Elena Lazarou, associate fellow in the U.S. and the Americas Program at Chatham House: “As the E.U.-Mercosur agreement enters the ratification phase, NGOs, civil society organizations and increasingly parliaments in E.U. member countries are opposing the deal. This reflects three elements. First is the dissatisfaction with the deregulatory environmental policies of the government of Brazilian President Jair Bolsonaro and with its attitude toward deforestation, illegal logging and biodiversity. This has raised serious concerns about compliance with the relevant provisions of the agreement and is in stark contrast with the E.U. Green Deal targets to achieve climate neutrality and to promote the fight against climate change globally. Second, the former occurs as the European Union steps up its ambition to incorporate values in trade agreements, and to further use FTAs as vehicles to promote standards on labor and human rights, on the environment and on sustainable development. Finally, concerns about the deal being a ‘lost opportunity‘ reverberate as studies conclude that the impact of the deal on sustainable development may not have been adequately assessed ahead of the deal and that more solid environment, societal and sanitary guarantees could have been pursued. Beyond environmental concerns, others have criticized the deal as a ‘cars for cows’ exchange favoring only certain sectors on each side—with a possible boost in agricultural activity in Mercosur also perceived as a potential root of further deforestation. While the future of the agreement is looking uncertain, there is significant value to be reaped if concerns about the above issues are addressed. Apart from being the biggest trade deal ever negotiated by the European Union, the deal could potentially support both sides in the recovery from the economic consequences of the ongoing pandemic. The European Union is Mercosur’s key trading and investment partner and a like-minded partner in areas of multilateral interest. While China has undoubtedly expanded its economic reach in the region, the space for political engagement with China is limited. With a new administration in Washington, which favors democracy, transatlanticism and climate multilateralism, compliance with the standards of the deal would be a positive move for the region’s relations with both the European Union and the United States.”

Thomas Andrew O’Keefe, president of Mercosur Consulting Group: “The announcement in late June 2019 that the European Union and Mercosur had concluded a trade agreement after more than two decades of negotiations was a surprise given continued opposition from many in the European agricultural sector, which had always been a bottleneck to a trade deal. The agreement appeared as an attempt to reassert the global importance of both trade blocs, particularly after Brexit. The accord’s sustainable development chapter, however, always seemed like a poison pill that could be cynically exploited to scuttle eventual ratification of the E.U.-Mercosur deal. Among other things, it requires Brazil to stop illegal deforestation in the Amazon. The Bolsonaro administration has done the opposite. This has allowed France and Ireland, whose farmers rely on high tariff protection and subsidies, to use protection of the world’s largest natural carbon sink as reason for opposing the trade agreement. Austria’s opposition is a bit disingenuous as it is premised on the sustainability chapter not going far enough to protect the environment and combat climate change. If the E.U.-Mercosur agreement is not ratified, it is unlikely to incentivize negotiating a free trade agreement between the United States and Mercosur. The more likely scenario is increased trade and investment with China, further displacing Europe’s traditional leading role in both areas in South America’s Southern Cone.”

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