On December 6, in Montevideo, Uruguay, and after 25 years of negotiations, the Southern Common Market (Mercosur) and the European Union (EU) signed a Letter of Intent to reach a Free Trade Agreement (FTA), a requirement prior to the Treaty, through which each Member State will establish which products will have their tariffs affected and which will not.
The Mercosur-EU FTA includes chapters on market access, the elimination of tariff and non-tariff barriers, investment promotion, intellectual property protection, and trade facilitation, among other topics.
According to a report from the Spanish Ministry of Foreign Affairs, the EU will liberalize 82% of agri-food imports from the Mercosur bloc and will impose tariff quotas for the most sensitive products. The demanding European food safety standards will be maintained, and the protection of 357 Geographical Indications (Denominations of Origin) of foods and beverages in the European Union will be guaranteed.
For its part, Mercosur will eliminate -in a period of 10 years- tariffs on 90% of its imports from the EU. Those sectors that have a higher tariff will benefit more, such as automobiles, capital goods, chemical products, pharmaceutical products or textiles and footwear.
It is important to highlight that this Mercosur-EU Free Trade Agreement has detractors, the most important of them: the French government and French farmers. In fact, France’s parliament rejected the agreement. Likewise, Poland, Austria and the Netherlands are against the FTA with Mercosur.
On the other hand, environmental organizations fear that as a consequence of the Free Trade Agreement there will be an increase in deforestation in the Amazon due to the expansion of agricultural activities; which also endangers indigenous communities in regions where land is in conflict or dispute between indigenous peoples and agribusiness.
The Mercosur-European Union Agreement represents the largest free trade area in the world.
A first look
At first glance, a signing of a free trade agreement (FTA) between Mercosur and the European Union (EU) would lead one to think that an increase in bilateral trade should be achieved, since:
1) The FTAs will eliminate tariff and non-tariff barriers, facilitating the exchange of goods and services between the member countries of both organizations.
2) Mercosur companies will have access to a broader market in the European Union, which will allow them to expand their operations and increase their exports.
3) The elimination of trade barriers can attract foreign investors to the region, which can benefit the economy and generate employment and therefore increase the Gross Domestic Product (GDP) of Mercosur members.
However, there are certain risks to consider such as unfair competition, Mercosur companies, especially small and medium-sized companies, may face unfair competition from European companies, which have or may have competitive advantages in terms of technology, capital and size. It is well known that Europe has greater economic power.
In 2022, the EU exported 27.7% of global exports and imported 29.6% of global imports. In the same period, Mercosur exported 1.90% of global exports and imported 1.59% of global imports. The European figures are logically higher, because their organization houses more countries, while the Latin American organization only consists of four full and active members (Argentina, Brazil, Paraguay and Uruguay).
In addition, some sectors of the Mercosur economy, such as manufacturing, may be affected by competition from cheaper and higher quality European products.
Likewise, the opening of markets can make the Mercosur economy become more dependent on the European Union, which can limit its economic and political autonomy.
BRICS and Brazil
This agreement is also carried out within a global dynamic, where multilateralism gains greater strength. Just as the BRICS have allowed the incorporation of countries without the same level of economic development as the founding countries (Brazil, Russia, India, China, South Africa), now the European Union has assumed the same position and is moving forward in adding relations with other blocks. . The EU started with Mercosur.
These times are very similar to when the First and Second World Wars broke out, there were power struggles because there was no single established power and when the wars ended the world leaders met in meetings such as the one in Yalta, where zones of influence were established. Until now Europe and the United States. They seem to be claiming this region – like Africa – as their area of influence. However, it is important to take into account the growing presence of China in the region, which is the main trading partner of many Latin American and Caribbean countries, including Mercosur members such as Brazil, Argentina and Uruguay.
In the case of Brazil, with a president like Lula da Silva who has been criticized by pro-free market economic experts for his contractionary fiscal policies, with this FTA agreement, a transcendental shift in its development model can be seen. This political action brings him closer to European imperialism and paves the way for the American empire. A fact that is added to his non-participation in the BRICS summit. All of Lula’s actions are completely contradictory to his past political behavior that sought Latin American integration and distanced himself from foreign imperial pretensions in our region.
Energy-wise, Brazil plays an important role for Latin America, being the leading oil producer. And according to energy trends from the Organization of Petroleum Producing Countries (OPEC), this country will double its production level by 2040. This country’s oil policy will become more important by 2030 when the US production level drops, and It will be necessary to increase supply and lower prices worldwide. Given Lula’s actions, the danger is that he signs an FTA with the United States and greater participation by American transnationals, because the field designs are carried out for long periods, up to 20 or 25 years. Lula’s oil policy will have significance in the future of his country and the region.
Last Thoughts
In a trade negotiation like this, first of all, it must be defined which countries have the greatest economic muscle for investment. In the case of Latin America, the region has been experiencing a process of economic slowdown; many of its countries already have fiscal policies of market opening to encourage foreign investment. However, the essential question to measure the effectiveness of this agreement is to know if Europe has the economic investment capacity that can generate the necessary production in these Mercosur member countries, to accelerate economic growth in these nations.
A fact that is further from reality, European countries finance Ukraine in the face of an open war conflict with Russia, which in turn is generating great losses due to the destruction of Nord Stream II and Nord Stream I, which stopped the gas supply. natural gas in the region and forced them to import liquefied gas, which is more expensive.
Likewise, the loss of an essential product such as wheat for the European diet, since Russia and Ukraine were the main and almost the only ones in the production of this item. Similarly, Europe is financing war conflicts in the Middle East. This symbolizes that this union between Mercosur-EU does not have (and probably will not have) much economic impact in the South American region.
