The EU-Mercosur Trade Tango

With the EU-Mercosur deal back on the table, climate concerns, social issues, and geopolitical dynamics still pose challenges. The re-election of Lula da Silva in Brazil and EU`s renewed push for such an agreement provides hope that a deal can be finalised this year. We believe a potential Trade and Technology Council between the two blocs (similar to the EU-US TTC) would act as forum for addressing common market solutions.

Mercosur, also known as the Southern Common Market, is a regional trade bloc in South America comprising Argentina, Brazil, Paraguay, and Uruguay, with Bolivia as an acceding member. The EU sees Mercosur as an essential trading partner due to its economic significance and potential. Indeed, the EU is Mercosur’s number one trade and investment partner1, and the Union aims to improve that partnership even further.

Yet, despite the numerous benefits such international cooperation presents for both actors, the EU- Mercosur relationship has been witnessing ups and downs in recent years. Rollbacks in environmental and sustainable protection efforts2, as well as accrued Brazilian isolationism during the Bolsonaro presidency from 2019 to 2022 certainly did not improve diplomatic relations between the two blocs.

However, the re-election of Lula da Silva as Brazil's president in 2022 served as a catalyst for re- engagement between Mercosur and the EU3. Lula's administration has expressed a willingness to enhance regional and international cooperation, which led to a renewed optimism in the trade relations between Europe and South-America4.

Lengthy Negotiations

Formal negotiations for a comprehensive trade agreement between the EU and Mercosur began in 2000. The talks aimed to build economic ties, reduce trade barriers, and create opportunities for growth in both regions. However, the negotiation process has been facing numerous hurdles and challenges over the years. Negotiations had to be relaunched in May 2016 to discuss additional elements required for effective market accesses. A trade agreement was reached in June 2019, but as aforementioned, the new Brazilian leadership at the time rendered the implementation of said agreements complicated to say the least5. Nonetheless, a new hope for EU-Mercosur trade talks began to sprout with Lula’s presidency, which has led to the EU-CELAC Summit in Brussels this month where, despite an improved horizon for the trade agreement, clashes between the two blocs persist6.

Main Challenges of the Trade Deal:
  • Climate Issues and the Amazon: One of the primary concerns in the EU-Mercosur trade deal is the environmental impact, particularly regarding deforestation in the Amazon rainforest. Environmentalists and some EU member states have voiced apprehensions about potential environmental degradation due to increased trade activities. Addressing these concerns and ensuring sustainable practices have become paramount for the EU in the negotiations. However, President Lula has recently criticised the EU for its perceived aggressive negotiation method when it comes to protection requirements for the Amazon rainforest, as he insists that Brazil does not need to demonstrate its sustainable credentials7. “Two strategic partners do not discuss threats. We discuss proposals." (Lula, July 2023)
  • Social Issues: Labor and human rights standards are critical areas of contention in the trade deal. The EU emphasizes the importance of respecting and upholding social rights, workers' rights, and fair labour practices within Mercosur countries. Ensuring compliance with such standards has been a sticking point in the negotiations8.
  • Position towards the Ukraine conflict: Mercosur's historical ties with Russia and its political dynamics within the BRICS have also impacted the trade negotiations. The EU seeks clarity on Mercosur's stance towards Russia and its illegal invasion of Ukraine, as ensuring alignment on geopolitical issues is vital for forging a strong partnership9.
    However, Mercosur governments have been reticent to condemn Russia’s illegal aggression against Ukraine, which has resulted in a watered-down language on Ukraine in the most recent EU–CELAC Summit Declaration10.
Benefits of a Trade Deal:
  • Geopolitical Benefits: A successful trade deal between the EU and Mercosur holds geopolitical significance, particularly in dealing with other major blocs like BRICS (Brazil, Russia, India, China, South Africa). Strengthening economic ties can enhance the EU's influence and position in the global arena, creating a stronger united front11.
  • Commercial Benefits: The trade deal aims to facilitate greater market access for goods and services between the EU and Mercosur, promoting trade flows and economic growth. It is expected to lead to an increase in exports, boost investment opportunities, and create employment on both sides12.
What the Future Holds for the Trade Deal

In light of recent developments and the re-election of Lula da Silva in 2022, the EU-Mercosur trade relations have entered a critical phase. Despite the challenges posed by climate issues, social concerns, and geopolitical considerations, the potential benefits of a comprehensive trade agreement are substantial for both regions. The Brazilian presidency indicated that they are ready to seek some sort of trade-off with the EU, particularly on public procurement concessions that would open up public contracts in the Mercosur countries, such as infrastructure projects, to big European companies.

To further solidify this partnership, the EU should push for the establishment of a Trade and Technology Council (TTC) with Mercosur, leveraging successful practices from the 2023 EU-US TTC13. Such a council could foster cooperation in trade, innovation, and technology, paving the way for mutual long-term sustainable development. Indeed, by addressing the existing challenges, staying committed to environmental and social responsibilities, and capitalizing on shared economic interests, the EU and Mercosur can forge a more resilient and prosperous partnership for the future.

Thanks to our prior experience with the 2023 EU-US TTC and our presence in South-America, Time&Place Consulting is well-positioned to support your organisation in comprehending the implications of an EU-Mercosur trade deal to your business operations, identifying competitive advantages and also to offer valuable assistance as a partner for any potential EU-Mercosur TTC.