Can an agreement with the EU resurrect Mercosur?

Talks between the two blocs began back in 1999, at the high tide of free trade and globalisation. But they proceeded desultorily. It took 20 years, the advent of Mr Trump and the rise of China to produce an initial agreement in 2019. But both sides had doubts. Many Europeans objected to the aggressive support of Jair Bolsonaro, Brazil’s hard-right president of 2019-23, for farming, ranching and mining in the Amazon rainforest. And at the time leftist Luiz Inácio Lula da Silva (known as Lula), who was then in opposition, and Argentina’s government were worried that granting more access to the EU’s manufactured exports would only serve to hasten their countries’ deindustrialisation.

Over the past 18 months Lula, now back in the presidency, and Ursula von der Leyen, president of the European Commission, sought to conclude the deal. Lula, who this week underwent surgery for a brain haemorrhage, achieved a partial opt-out on government procurement; Brazil’s health service will continue to buy mainly from local pharmaceutical firms. The new deal incorporates the Paris agreement on combatting climate change. A new “rebalancing mechanism” allows either side to invoke mediation and possible retaliation if unilateral actions, such as the EU’s proposed regulation on deforestation, harm the trade of the other party.

If the commission was prepared to be more flexible than in the past, it is because Russia’s invasion of Ukraine and Mr Trump’s return have made many European leaders rethink. “For the EU, this is important economically, but [it is] very much a geopolitical decision,” says Cecilia Malmström, a former European trade commissioner. “With a possible tariff war coming up, Europe needs friends and allies.”

The deal is hardly a free-trade revolution. It will remove tariffs on around 90% of trade in goods between the two sides, but mostly over a period of up to 12 years and in a few cases longer. Agricultural exports from Mercosur will be subject to gradually rising quotas. Nevertheless, the agreement is a big one. Mercosur’s core members, which also include Paraguay and Uruguay, have a combined population of 275m people—and a total GDP of $3trn, making it the EU’s biggest economic partner after Japan and Britain. (Bolivia joined Mercosur this year, but is not party to the agreement). Total trade between the two blocs is close to $150bn a year.

In a study of the 2019 agreement, Brazil’s Institute for Applied Economic Research, a government-linked think-tank, reckoned Brazil would make the biggest gains, with another $6.2bn in farm exports between 2024 and 2040. But European exports of manufactured goods would rise too. And the EU got Mercosur to recognise the geographical definition of more than 350 products: so no more Argentine “champagne” or Brazilian “gorgonzola”.

Perhaps more important, the agreement may prompt an increase in trade in services and in European investment in Mercosur, says Welber Barral, a former trade secretary for Brazil. “It increases legal security for investors and reinforces it within Mercosur,” he says. In particular, Europe sets store by secure access to critical minerals and raw materials for green energy. Brazil and Argentina are significant sources of copper and lithium, while Brazil also has rare earths. Above all, the agreement provides Europe with a strategy for South America, a region where it remains a major economic partner but has fast lost clout to China.

Lula’s switch from sceptic to champion of the deal reflects his desire for Brazil to retain its autonomy in a world where Mr Trump and China both push countries to take sides. Brazil has been discomfited by China’s drive to expand the BRICS group into an anti-Western front. “Having alternatives is crucial,” says Oliver Stuenkel of Fundação Getulio Vargas, a Brazilian university. “The more Brazil and others in Latin America can work to diversify their strategic partnerships, the better.” The same logic applies on the European side.

The deal may revive Mercosur, a cornerstone of Brazil’s foreign policy since the 1990s. It was close to death. The growth of its members’ exports of commodities to China, the decline of industry as well as political volatility have all reduced the importance the bloc had in the early years after its founding in 1994. Partly because of Brazilian protectionism, Mercosur had previously struck trade deals only with small economies, such as those of Israel, Egypt and Singapore. Uruguay has flirted with striking a bilateral trade deal with China, which would be against Mercosur’s rules. Argentina’s new president, Javier Milei, has threatened to leave. The EU agreement “gives Mercosur a lifeline,” says Mr Stuenkel. “If it goes through, there’s a chance that Milei will stick with it.”

To ease ratification in Europe, the trade part has been duplicated in a separate agreement that requires assent only by EU national governments and the European Parliament for it to take effect. The full treaty must be approved by national parliaments. National governments are likely to discuss the deal in the summer.

It is torn between its protectionist instincts and geopolitical calculation. France opposes the trade agreement but may not be able to get the necessary blocking minority of at least four countries totalling 35% of the EU’s population. With Germany, Spain and Sweden strongly in favour, the outcome may depend on Poland and Italy. The EU’s credibility as an economic partner will be at stake.

Correction (December 14th 2024): We previously said that the trade part of the treaty required the assent of the European Council. We should have said the Council of the European Union. Sorry.

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