(Bloomberg) -- The European Union and South American nations have spent more than a quarter of a century trying to strike a deal on free trade. The negotiations took on new urgency this year as a looming trade war between the world’s biggest trading partners — the US and China — spurred other regions to seek out new commercial partnerships to soften the blow.
The two sides finalized negotiations on Dec. 6 to erase a swathe of tariffs and other trade barriers, giving companies in Europe and a group of countries in South America’s Mercosur trading bloc — Argentina, Brazil, Paraguay and Uruguay — greater access to more than 700 million consumers across the two regions.
The deal still needs to be signed off by the 27 EU member states, a process that’s set to be slow and uncertain. There’s loud opposition from farmers in countries such as France and Poland, who fear a flood of cheap South American imports will damage their livelihoods.
Why has there been progress toward a trade deal?
Broadening the EU’s global trading relationships could soften the potential hit to its exports if Donald Trump raises tariffs on foreign goods during his second US presidency. With China threatening to retaliate against Trump’s protectionist agenda, the EU stands to lose from a broader downturn in global commerce even if it doesn’t impose any trade barriers of its own.
Whatever happens on the tariff front, a Mercosur trade deal has taken on greater urgency for the EU, with China in the midst of an ambitious trade and investment drive in South America that could undermine European business interests in the region.
European Commission President Ursula von der Leyen flew to Uruguay to conclude the negotiations before securing the support of major agricultural nations including France and Poland.
These countries have consistently blocked a deal for fear it would flood their home markets with cheap food that undercuts locally made produce. But France’s leaders have been distracted by political turmoil since an inconclusive legislative election in July. Germany’s government recently swung behind a Mercosur trade deal as a way to access new car buyers to boost its struggling automotive industry.
In concluding the negotiations, von der Leyen may be calculating that France won’t rally enough support from countries such as Italy to stop it going through. Blocking the agreement would require the opposition of at least four countries containing at least 35% of the EU population.
What’s in the EU-Mercosur trade deal?
The EU will get zero-tariff access to Brazilian exports of several raw materials including nickel, copper, aluminum, germanium and gallium, many of which are needed urgently as European nations shift toward green technologies such as electric cars and wean their economies off fossil fuels.
Most tariffs on manufactured goods will eventually be removed — although this could take decades in the case of Mercusor imports of European cars — and there will be larger EU import quotas and reduced or eliminated duties on products including beef, poultry, sugar and soybeans.
The agreement is also designed to boost adherence to labor laws and enforce nations’ climate-related commitments. It includes a “rebalancing mechanism” that could be used to help Mercosur countries deal with any EU measures that end up impairing the trade deal. South American governments are concerned that their companies could end up being penalized by some new EU policies, including a carbon border tax and an anti-deforestation law.
When will the trade deal come into effect?
That could take years to happen, if past experience is any guide. Negotiations on a trade deal between the EU and Canada were wrapped up in August 2014. It came into force provisionally in 2017, but several EU countries have yet to fully ratify the accord.
The EU-Mercosur agreement needs to be translated into all EU languages, undergo a legal review and then be ratified by member states and the European Parliament. A smaller part of the deal not related to trade is also likely to require approval by national parliaments. It also needs ratification by the parliaments of the South American nations.
Why are European farmers worried about the deal?
The fear is that the higher cost of food production in the EU — partly due to smaller farms, higher energy and other input costs and stricter environmental, safety and health requirements — will mean European farmers are unable to compete on price with South American imports.
EU farmers are also concerned that South American nations don’t have the kind of strict supply chain monitoring to make sure farm products sent to the EU meet the required standards — for example making sure that beef is free of growth hormones.
France’s farmers took to the streets to oppose the Mercosur deal over the past couple months, decrying what they called the risk of unfair competition. The French parliament overwhelmingly rejected the Mercosur agreement in a November vote. Annie Genevard, who was agriculture minister at the time, said the draft agreement didn’t allow for fair competition for French farmers.
What’s the EU doing to win over skeptics?
There are clear upsides for some food and drink producers, with tariffs on EU wine exports to Mercosur nations going from 27% to zero, and cheese producers set to benefit too.
New EU environmental measures such as the deforestation law are likely to act as a brake on some imports of South American goods such as beef, coffee and cocoa, as the region’s producers will need time to adhere to the new rules.
The European Commission has vowed that no agricultural sector in the EU will be put at risk from the trade deal, and plans to set up a €1 billion reserve fund to compensate farmers for lost business.
Von der Leyen is also offering €3 billion in loans from the European Investment Bank over the next three years for small- and medium-sized farms. The EU Commission has relaxed state aid rules for agriculture and increased the subsidies that member states can extend to farmers without prior approval from the commission to as much as €50,000 over three years, up from €25,000 previously.
--With assistance from Megan Durisin and Brendan Murray.
©2024 Bloomberg L.P.