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.

Brazil’s isolation: a love affair - Bill Hinchberger (Global Finance)

 Brazil loves its isolation, says an ex-president. Is the country ready to play a larger role on the global stage?    

Global Finance magazine, SEPTEMBER 26, 2023

Author: BILL HINCHBERGER

Luiz Inácio Lula da Silva seems to log more time on his souped-up Airbus than he does at the Alvarado Palace, the presidential mansion in Brasília.

His jet-setting started in November with the COP27 climate summit in Sharm El-Sheik, where the then president-elect was “welcomed like a rock star,” according to the French newspaper Le Monde. He promised to clean up after his predecessor, climate skeptic Jair Bolsonaro, who oversaw a notable uptick in deforestation in the Amazon.

Since his inauguration in January for a second stint (on top of two terms from 2003-2011), Lula has visited over a dozen countries, outpacing even his American counterpart Joe Biden for his presence on the global arena.

Yet “Brazil remains closed,” states veteran Brazilian businessman Roberto Teixeira da Costa in a new book, “Is Brazil Afraid of the World? Discussing Brazilian Foreign Affairs and Challenges.” Of the world’s 15 largest economies, Brazil has ranked “among the lowest” when it comes to the importance of international trade to its economy, he said in the book. This even before Bolsonaro turned Brazil into a “pariah,” says the author, who founded and served as the first president of the Brazilian Security and Exchage Commission (CVM) and is currently chairman of the Arbitrage Chamber of the São Paulo Stock Market (Bovespa).

Relative to its size, Brazil scores lower than one would expect on international participation in all realms, including trade and historic incoming and outgoing FDI. Teixeira da Costa doesn’t blame foreign bullies for blocking Brazil. Instead, he quotes former President Fernando Henrique Cardoso: “Nothing makes Brazilians happier than isolation.”

Part diagnosis, part prescription, Teixeira da Costa’s book may serve as a primer for those who wonder why a continent-size nation of 215 million is often marked down as absent during important international roll calls. For Brazilians, it poses a series of Socratic questions designed to fuel debate, concluded reviewer Marcelo Consentino in the daily Estado de São Paulo.

“The thesis of the book is that Brazil fails to recognize the role it should play in international relations, and instead accepts a secondary role,” Teixeira da Costa says. “Brazil should become a protagonist.”

Many well-informed, well-meaning, and experienced Brazilians remain unconvinced, at least when it comes to the “just do it” modus operandi. “Brazil’s capacity is modest,” says Paulo Roberto de Almeida, a diplomat and director of international relations at the Institute of History and Geography of the Federal District University in Brasília. “First, because of its level of economic development, the average strength of its military force, and the limited resources devoted to international cooperation.”

National pride matters, as it does everywhere, but practical considerations loom large—including a longing to put to rest an old joke. Granted a permanent visa by President Getúlio Vargas during World War II, exiled Austrian writer Stefan Zweig published a book titled, “Brazil, Land of the Future.” Cynical Brazilians began to quip, “Land of the future, and always will be.”

Teixeira da Costa believes that greater international integration can help Brazil address sticky domestic problems, notably poverty and inequality, and help muffle that ostensibly antiquated joke. Brazil perennially ranks near the bottom on the Gini Coefficient, which measures economic inequality. At 12.4% in December 2022 (CEIC Data), Brazil’s low domestic savings rate means that it cannot go it alone. “We have to attract [foreign] investment,” said Teixeira da Costa.

Based on historical data, one would expect inflows from the United States and Europe. These traditional partners must shore up supply chains, given weaknesses revealed by Covid-19 restrictions and fallout from the Russian war in Ukraine. Brazil shores might seem to offer safe ports.

Reticence could be traced in part to the now infamous Custo Brasil (Brazil Cost), which Teixeira da Costa defined in the book as: excessive bureaucracy; high and complicated taxes; high labor costs; high social security costs; frequent regulatory changes; excessive legislation; and conflicts among federal, state and local governments. One example: As a technologically advanced, post-lockdown world adopts more flexible and creative working relationships, Brazilian labor laws remain mired in a model designed for early-20th century factories. “All of this insecurity messes things up,” says Lika Takahashi, head of equity strategy at Fator Asset Management in São Paulo, while referring to a few recent debates over big issues in Congress.

Abrupt alterations and intergovernmental conflicts create uncertainty. This inconsistency is particularly evident in the foreign policy realm.

Of the post-dictatorship presidents since 1985, Teixeira da Costa points to Cardoso and Lula as “particularly active abroad.” (He could have included Fernando Collor de Mello. Before his impeachment on corruption charges, Collor cut tariffs, facilitated foreign investment, hosted the 1992 Earth Summit in Rio de Janeiro, and signed the Mercosur regional pact with Argentina, Paraguay and Uruguay.)

Look at the contrasts between the Cardoso and Lula administrations. Cardoso proved “more balanced,” as Teixeira da Costa said in our interview, whereas Lula focused on South-South relations and what some would call “Third World-ist” policies. Now consider what the book calls the “Bolsonaro administration’s blind march toward Donald Trump’s America.” Add to that the lack of reliable foreign policy interlocutors in Congress or the business community. You can understand why outsiders might get weirded out.

One external actor appears willing to wade through the weirdness: China. As with the United States, Teixeira da Costa devoted an entire chapter to Brazilian-Chinese relations. Even under the watch of Trumpista Bolsonaro, “In the first half of 2020, for every dollar Brazil exported to the United States, US$3.4 went to China,” states the book.

Given his South-South proclivity and enthusiasm for the BRICS+, Lula might be expected to lean more firmly into China for FDI. With 11 members, the new BRICS+ accounts for over one-third of global GDP and nearly half of world population, though it is top-heavy with China on both accounts.

When it comes to prescriptions, Teixeira da Costa can seem exceedingly nitpicky and refreshingly specific. Do problems exist at all levels of government and business? Yes. And they can all be addressed. Poor language skills and understanding of the world? More and better education in those realms. If your company is big enough, the board should be required to examine opportunities abroad. Navel-gazing industrial associations should lift their heads and look around.

The 20th century Brazilian composer and poet (and career diplomat) Vinicius de Moraes, perhaps best known for his collaborations with Tom Jobim and other Bossa Nova personages, wrote the song “Medo de Amar (Afraid to Love).” A quarter of a century after de Moraes was expelled from the foreign service by the military dictatorship, it might be time for Brazil to overcome its fear of the global stage.

Or maybe it is time for Brazil to just get down and dirty. In the book, Teixeira da Costa recalls a comment he made in the 1990s to Bill Clinton’s special envoy to the Americas, Mack McLarty: “He who does not make dust, eats dust!” According to the Brazilian, they still get a laugh out of that one.