Mercosur-EU Trade Deal Challenges Protectionism - Bill Hinchberger Global FInance

Mercosur-EU Trade Deal Challenges Protectionism

Bill Hinchberger

Global FInance, March 5. 2025

https://gfmag.com/economics-policy-regulation/mercosur-eu-trade-deal-challenges-protectionism/

Twenty-five years in the making, the landmark agreement eliminates tariffs on over 90% of goods while reshaping South America-Europe trade ties. 

A quarter-century after negotiations began, Mercosur, the South American trade bloc whose core members are Argentina, Bolivia, Brazil, Paraguay, and Uruguay, has finally signed a trade agreement with the European Union (EU). The deal runs against the grain in an era of growing protectionism and rising deglobalization.

“This agreement is not just an economic opportunity, it is a political necessity,” European Commission President Ursula von der Leyen said at the Mercosur Summit in Montevideo in December, where the pact was signed. “I know that strong winds are coming in the opposite direction, towards isolation and fragmentation, but this agreement is our near response.”

The deal is the EU’s largest ever and Mercosur’s first with a major trading partner.

“European products will enter [the Mercosur] market under much better conditions than US or Japanese products,” Federico Steinberg, visiting fellow at the Center for Strategic and International Studies in Washington, DC, wrote in a paper published on December 6. By eliminating tariffs on over 90% of goods, the agreement is expected to save EU exporters €4 billion annually while granting South American producers preferential access to European markets for competitive agricultural products.

The agreement has two parts. One covers goods, services, public procurement, and intellectual property, focusing on trade issues such as tariffs, with special attention to automobiles, agriculture, and critical minerals.

“Increasing uncertainties in geopolitics” have sparked interest in rare earth minerals, says Charlotte Emlinger, an economist at the Center for Prospective Studies and International Information (CEPII) in the French prime minister’s office. For sensitive items, such as beef exports to Europe, quotas put a lid on inflows.

The second part of the pact addresses broader themes, including human rights and the environment. Along with another 2024 EU trade pact with New Zealand, it breaks new ground by referencing the Paris Agreement on climate change, a detail notably accepted by Argentine President Javier Milei, a global-warming skeptic.

What Is Mercosur And Why Does It Matter?

With a combined GDP of nearly $3 trillion, the four core members of Mercosur—Spanish for “Southern Common Market” in Spanish—would rank as the world’s fifth-largest economy. Some 300 million people live in an area of nearly 15 million square kilometers. The GDP figure doesn’t include Bolivia, which has been approved for membership but is in a four-year “implementation period” to come fully on board.

The EU was already Mercosur’s second-largest trading partner two years ago for goods, accounting for 16.9% of total trade, trailing China but beating the US, according to the European Commission. The EU exported €55.7 billion worth of goods to Mercosur that year, with €53.7 billion going the other way.

Touted as the emerging EU of the South when it was founded in 1991, Mercosur has yet to evolve beyond an imperfect customs union. The original four added Venezuela in 2012 only to suspend it in 2016 for violating political standards; Bolivia rose to full membership last year.  Suriname, Guyana, Colombia, Ecuador, Panama, Peru, and Chile are associated states; they won’t be formally affected by the EU-Mercosur deal.

Intra-regional trade among the four founders jumped four-fold to $16.9 billion between 1990 and 1996, according to the Inter-American Development Bank, but true integration has proven elusive. Internal trade remained at just 10.3% of the global total in 2022, according to data from the Observatory of Economic Complexity, an online database.

Why Now?

The timing of the deal can be linked to efforts by the EU to ensure continued robust and diversified trade in the face of protectionist measures by the US under US President Donald Trump, the growing role of China, and the demise of the World Trade Organization (WTO) as an effective facilitator of international trade integration.

“In the last few years, the geopolitical situation has become more dire for the EU,” says Maximiliano Marzetti, associate professor of Law, Department of International Negotiation and Conflict Management, Lille Economics Management Lab in France, “with the war in Ukraine, Brexit, and the protectionist and aggressive policies of China and the United States. The EU needs new trade partners in a climate of hostility to free trade and also to assert its relevance on the current multipolar international stage.”

Mercosur-EU negotiations date much further back: to 1999, during the period of “peak globalization,” but they remained in low gear until late in the Obama administration, when the US began taking measures to weaken the World Trade Organization.

Bartesaghi, Catholic University of Uruguay: With the sweeping deal, the EU wanted to send a message to Trump.

Given a toothless WTO, bilateral and multilateral agreements became more critical, and the EU unleashed a flurry of activity. In Latin America, it added to accords with the Andean Community (Peru, Colombia, Ecuador) and Central America (Honduras, Nicaragua, Panama, Costa Rica, and El Salvador) as well as bilateral agreements with Chile and Mexico, both recently renewed.

With the sweeping new Mercosur deal, “the EU wanted to send a message to Trump,” says Ignacio Bartesaghi, director of the Institute of International Business at the Catholic University of Uruguay. “We know that you are going to close. We want to open.”

Mercosur, for its part, needed a victory. Either it “closed a deal with the EU, or it would die,” Bartesaghi argues.

All members are far from speaking with one voice, however.

Argentina’s self-described “anarcho-capitalist” President Javier Milei has offered harsh words for Mercosur, even as he begins a one-year stint as the group’s president pro tempore. During a speech at the Mercosur summit, Milei described the bloc as “a prison that prevents member countries from leveraging their comparative advantages and export potential.”

A month later, in Davos during the annual meeting of the World Economic Forum, Milei told Bloomberg that he would abandon Mercosur and its Common External Tariff, which preempts side deals, for an accord with the US. “If the extreme condition were that, yes,” he said. “However, there are mechanisms that can be used, even being within Mercosur.”

Uruguay, too, has been exploring an independent deal with China. But “negotiations never started because of Lula’s vision of Mercosur being together,” notes Bartesaghi.

Nor do these piecemeal agreements solve all the problems. The renewed bilateral deal with the EU will not solve associate member Mexico’s problems if it is hit with higher tariffs from its northern neighbor.

“Remember that the US accounts for 80% of Mexican exports and the EU accounts for less than 5%,” says Ashkan Khayami, senior analyst, Latin America Country Risk at BMI, a British multinational research firm. “It’s not really plausible for the EU to replace the US as kind of the main destination, or even a very significant destination, for Mexican exports.”

What’s Next?

Next comes ratification. For Mercosur, this is straightforward. Legislatures must vote, but if one balks, the accord will still apply for those that approve the deal. In Europe, however, the process is complex both bureaucratically and politically.

Prior to December, French farmers were out protesting the Mercosur deal; a resolution against the deal has been filed in the French parliament. Politicians in Poland, Italy, and the Netherlands, too, are raising questions. But observers tend to chalk this up to domestic posturing.

Thanks to the above-mentioned quotas for beef, for example, “that’s just a hamburger per inhabitant,” says Bartesaghi. Paraphrasing a French colloquial saying, “Mercosur is the tree that hides the forest,” Emlinger quips.

While the EU has sovereignty over trade, other treaty issues need member states’ approval. Proponents may therefore try to split the Mercosur text into its two component parts, trade and other. The trade section could presumably be fast-tracked though the European Parliament, where it would need votes representing 65% of constituents. Other sections, including environmental issues, would take the longer, country-by-country route.

“It is likely that the EU will opt, if it can, to split the ratification process,” says Marzetti.

Patentes de vacinas anti-Covid na ministerial da OMC - Doug Palmer and Sarah Anne Aarup (Politico)

 Politico EU, Bruxelas – 11.6.2022

Globalization's gut check: 

World Trade Organization gathering offers a test of free trade system

If the global organization can’t reach a consensus on some of the low-hanging fruit on its agenda, there is little hope it can help tackle the world's biggest challenges.

Doug Palmer and Sarah Anne Aarup

 

The future of globalization faces a major test as the World Trade Organization kicks off its first big decision-making meeting in five years in Geneva on Sunday.

The immediate issues on the table involve Covid-19 vaccine patents, environmentally harmful fishing subsidies and global food security concerns heightened by Russia’s war in Ukraine.

But the bigger question looming over the gathering is whether the WTO can still forge international cooperation at a time when multiple crises and increasing frictions between the United States and China are upending the world order. Those crises have spurred a widespread re-think of globalization: Countries are increasingly turning their economic focus inward, looking to protect and promote their own industries — often at the expense of the open trade system that the WTO was designed to promote.

The WTO’s ministerial meeting, slated to run June 12 to June 15, will try to tackle some of those trends — albeit at the margins. If the organization can’t reach a consensus on even low-hanging fruit like easing fishing subsidies and maintaining a ban on e-commerce tariffs, there is little hope it can accomplish more challenging objectives such as contributing to the fight against global climate change or shoring up food systems as global hunger skyrockets.

“That’s why this is such a critical period for the system,” said Rufus Yerxa, a former WTO deputy director general who now works for McLarty Associates, an international trade consultancy. “Because if we really sort of disembowel the WTO now, it’s going to be harder to use it in the future to achieve those kinds of objectives.”

“I think it is important that the WTO be seen as part of the solution to the simultaneous crises we’re facing in the world now,” WTO Director-General Ngozi Okonjo-Iweala told POLITICO in an interview. “All of these crises at the same time that no one country in the world can solve. You need multilateralism. You need international cooperation.”

Recent crises like the Covid-19 pandemic and the Russian invasion of Ukraine have only served to further divide the globe, however — between rich countries able to rapidly produce their own Covid vaccines and low-income nations who couldn’t; and between Western democracies, who’ve rallied to isolate Russia, and much of the rest of the world, which is taking a far more ambivalent stance on the conflict. The crises have also heightened the rivalry between the U.S. and China, the world’s two leading economies, which are pushing very different models of trade and governance.

President Joe Biden has repeatedly described that rivalry as a battle to prove democracy still works better than autocracy in the 21st century. And his administration, including Treasury Secretary Janet Yellen, have been advocating a new model of economic engagement that focuses on collaboration with friendly countries, or “friend-shoring.”

Okonjo-Iweala, however, warned this week that splitting up the world’s economies and supply chains into political blocs would have damaging consequences — noting that WTO economists have made a preliminary estimate that dividing the world into two economic spheres would lead to a 5 percent decrease in real global GDP over the longer term.

“That is quite a stunning number,” the WTO chief said. “I’d like us to be careful. This multilateral trading system was built up over 75 years. It’s helped to lift over a billion people out of poverty. It’s delivered peace, which is one of the things it was intended to do, through interdependence.”

Still, Russia’s war in Ukraine has further fractured the international community and propelled the world toward an unprecedented hunger crisis as inflation and conflict push up the price of food for the world’s lowest-income people.

Okonjo-Iweala said she did not expect Russia’s participation next week to prevent deals from being reached, even though many delegations refuse to meet with them. Negotiators have devised ways to work around that obstacle over the past few months, she said.

“Undoubtedly, there will be some tensions as there have been in every meeting. We hope this will not stop us doing our work,” Okonjo-Iweala said.

But the war adds to the array of problems distracting attention from the rules-based trading system embodied in the WTO.

“I can hardly think of a more difficult backdrop for a WTO ministerial than this one,” Yerxa said. “I think the biggest challenge, obviously, is to try to make governments recognize that the risk of even further destabilizing multilateralism is that it won’t make their domestic politics better in the long run, it’ll make them worse.”

Okonjo-Iweala, who took the helm of the global trade body a little more than a year ago, is trying to notch up two big wins in the form of agreements that could potentially expand production of Covid vaccines and curtail environmentally harmful fishing subsidies.

She also is pushing the WTO to fashion a broader response to the pandemic — even though many see any agreement at this point as too little too late — and to issue a statement aimed at keeping food flowing across borders by discouraging export restrictions.

To accomplish that, she’ll have to bring every country on board — or at least persuade them not to voice their objections — because of the consensus-based nature of WTO rulemaking. Failure to do so could reinforce the idea that the WTO is incapable of reaching big deals involving all 164 members or addressing tough issues like climate change.

U.S.-China tensions are playing out in the Covid-19 vaccine talks, where the United States wants Beijing specifically excluded from using the proposed agreement to make generic versions of foreign vaccines, such as those produced by Moderna and Pfizer.

They’re also on display in the fishing subsidy talks, where Washington is pushing for countries to agree on a provision that would require WTO members to report annually on what they know about the use of forced labor in the seafood sector.

India, meanwhile, has issues that it is pursuing in a number of the negotiations that could frustrate efforts to reach agreement. One of its demands could lead to the end of a 24-year-old moratorium on the collection of duties on digital goods such as movies, software and video games, as well as an array of digitally-enabled services.

Members have also been fighting over the wording of a paragraph to set the stage for discussion for modernizing the WTO’s underlying rules.

Most countries favor a “streamlined” WTO reform statement containing three elements: a recognition of the broad consensus on the need for reform, the need for the process to be transparent and inclusive, and the need for it to address the interests of all members.

But India and a few other members favor a more prescriptive, strictly multilateral reform process that would open up the opportunity to revise the Marrakesh Agreement establishing the WTO. “It’s an agenda going backwards and reopening what we negotiated 30 years ago,” a Geneva-based trade official said.

That disagreement just further illuminates how hard it is to make progress in an institution that requires complete unanimity to operate, and why members like the United States and the EU are increasingly attracted to plurilateral pacts among smaller groups of WTO members rather than the entire organization.

Adding to the nervousness: The WTO has a history of producing big flops at its ministerial meetings, including spectacular meltdowns in Seattle in 1999 and Cancún in 2003. The group’s last ministerial conference in Buenos Aires in 2017 ended without any tangible outcome.

“I view it as a moment of truth for the WTO,” said Wendy Cutler, a former senior U.S. trade negotiator who now is vice president of the Asia Society Policy Institute.

If trade ministers leave Geneva next week with nothing to show for their efforts, that would accelerate “a trend we’re already beginning to see where countries want to work with other like-minded countries to set the rules,” Cutler said. “The WTO rules have kept everyone in the same room, and as the WTO becomes less and less productive and efficient, its ability to be relevant in this complex, complicated world diminishes.”

Kelly Ann Shaw, a former Trump administration trade official now at Hogan Lovells law firm, agreed: “If they can’t even agree on language just directing countries to think about WTO reform, it’s really hard to think about how they’re actually going to reform it.”

Just days ahead of the meeting, U.S. Trade Representative Katherine Tai was cautious about the chances for big breakthroughs at MC12.

“There are a lot of conversations, important ones, that we need to advance. Whether or not we can get them across the finish line, I don’t know,” Tai said on Monday at an event hosted by the Washington International Trade Association. “But it is really important for us to have MC12. And then it is really important for us to wake up the day after MC12 and feel like we have a vision for what we would like MC13 to be.”

Critics complain that the Biden administration has done little to shape that vision, aside from a speech Tai gave last year, where she repeated U.S. complaints about the WTO’s dispute settlement system and urged members “to start actually listening to each other” instead of spouting their favorite talking points.

“Historically, officials from the U.S. Trade Representative Office have worked diligently, often behind the scenes, to bring the members to positive outcomes,” Bill Reinsch, a trade policy specialist at the Center for Strategic and International Studies, recently wrote. “That does not seem to be the case this time around.”

Despite that, even modest progress would provide a shot in the arm for a world that is becoming less and less stable.

“If we invest in it now and reaffirm its centrality to more multilateral trade cooperation, then it becomes possible in the future to expand the agenda,” Yerxa said.