EU-Mercosur: So Much More Than a Dead Deal

Commentary by Lauri Tähtinen

Published March 26, 2024

Introduction

On June 28, 1999, the European Union and Mercosur-the South American trade bloc consisting of Argentina, Brazil, Paraguay, and Uruguay-began negotiating the EU-Mercosur Trade Agreement. Twenty years later to the day, they reached an agreement in principle, or in the words of the European Commission, "an ambitious, balanced and comprehensive trade agreement." Yet almost five years on, the Association Agreement remains in limbo, and many experts are already saying that it is a permanent state. Even those who are more optimistic fear that if the renegotiations blow past the quarter-century mark, this will spell the end of an effort that has occupied the better part of some trade negotiators' entire careers. Such a whimper would be a great pity; thus, the possible death of EU-Mercosur is cause for sounding a loud bang.

Already in a limited sense, EU-Mercosur is a big deal. It is a big deal because the European Union represents 450 million people and Mercosur over 280 million people, including Bolivia, which was admitted to full membership in December 2023, but excluding Venezuela, whose membership was suspended in December 2016 after only four years due to its failure to incorporate trade and human rights rules into national law. Depending on the measurement used, the new free trade area would amount to around 20 percent of the world's GDP. In 2022, the bilateral trading relationship consisted of close to $67 billion (€63 billion) of exports from Mercosur into the European Union and slightly under $60 billion (€56 billion) in exports from the European Union into Mercosur.

The emergence of the European Union's bilateral trade deficit at close to $8 billion is news and presents a new challenge to an already troubled negotiation. This also meant a major reversal in the longer-term decline of the European Union as an export destination for Mercosur products, after it had lost, in 2015, its position as the primary destination to China. In 2022, the European Union returned to receiving just over 14 percent of Mercosur exports, while still well down from over a quarter of Mercosur's shipments at the inception of trade talks in 1999. It is precisely the role of China and other external powers that gives this trade deal broader strategic heft.

The Meaning of a Deal

Many Europeans have long believed that cultural and linguistic ties would help to maintain ties between the two trading blocs, strengthening the glue of European investment in Mercosur countries. However, in a world of increasingly fierce geopolitics and, relatedly, economic competition, there is a growing consensus that soft ties are increasingly insufficient to bind countries or blocs together. Within the blocs, many interest groups and individual countries-especially in Europe-advocate against the EU-Mercosur deal. While most countries and interest groups in both blocs see the benefit of an agreement and associated closer cooperation, they reach this conclusion at a lower intensity level than those opposed to a renegotiated deal. To put it bluntly, the latter are louder and seem to care more about the outcome.

At a higher plane, both parties should wish for the conclusion of an agreement and so should the United States, as it shares an interest in the orientation of both EU and Mercosur countries away from China. This is because the rapid decline of U.S. trade in South America (in both absolute terms and relative to China) has also contributed to democratic backsliding. This does not mean that, in the world of diplomacy, the United States has an easy time advocating for two parties to reach an agreement that it is unwilling to arrive at with either party. In the world of trade diplomacy, it is also clear that some lobbies within the United States will be marginal losers if an EU-Mercosur deal is concluded.

This is why the role of trade diplomacy needs to be placed within a broader context. When Washington itself no longer looks to conclude trade deals, their broader benefits should be sought by proxy, as happened when a Japan-led coalition saved the Trans-Pacific Partnership (TPP). In the case of EU-Mercosur, both blocs have demonstrated that they remain capable of arriving at free trade agreements (FTAs), at least, with the correct, smaller counterparty. Two deals were concluded in late 2023: the European Union with New Zealand and Mercosur with Singapore.

Mercosur on the Brink

For a trade deal between the European Union and the Mercosur to come to fruition both counterparties need to exist. This is no mundane assertion, as the survival of the latter was questioned several times in 2023 by commentators and politicians alike.

Most prominently, Argentina's Javier Milei spent time on the campaign trail threatening to leave the bloc. Once he was elected, the outgoing administration gave Milei's arrival as a reason not to conclude renegotiations with the European Union before the new president had entered office. However, soon after his December inauguration, it became clear that Milei had concluded that Mercosur and close bilateral ties with its main export destination Brazil had to be a part of a longer-term solution to Argentina's economic woes.

However, it takes two to tango and Lula notably missed the first dance: Milei's inauguration. The sensitivity of Argentine-Brazilian relations was also highlighted in late February with Milei sharing an image from Brazil's former president Jair Bolsonaro's pro-Israel rally; Lula's Workers' Party chief Gleisi Hoffmann suggested that Milei cared more about "offending Lula" than "resolving the grave problems facing the people of Argentina." In recent years, it has become the rule rather than the exception that relations between Buenos Aires and Brasília break down along partisan lines, much to the detriment of cooperation within Mercosur.

Brazil held the rotating Mercosur presidency until December 2023, and toward the end of the presidency, expectations for an agreement with the European Union were running sufficiently high that the European Union's trade commissioner Valdis Dombrovskis was supposed to travel to Brazil to finalize the deal. Lula has continued to emphasize the importance of the deal and expressed hope for its conclusion, something that he has been positive about for the better part of a year. However, European counterparts have also grown increasingly weary of the third-term instantiation of Lula, whose foreign policy stances appear increasingly erratic. Comparing Israeli actions in Gaza to the Nazi genocide of Jews is a sure way of dampening enthusiasm for the agreement in Germany, the one large EU member state positive about the trade deal. Lula's stances on Ukraine and Israel are also distracting from his success in rapidly reducing the rate of deforestation in Brazil's Amazon, the original concern voiced by many Europeans.

While Milei may equivocate on Mercosur and Brazil's president undercut it with his broader agenda, it is not just Argentina and Brazil that matter. Bolivia, the newly admitted member, has tremendous mineral wealth but has tied its economic fortunes closely to China's, trading in yuan. It is also receiving billions of dollars in investment from Chinese groups and Russia's Rosatom to develop its lithium. Uruguay has, for 20 years, had a comprehensive bilateral trade agreement with Mexico and, more recently, with Chile. While other Mercosur states have been willing to accede to Uruguay's interest in furthering its trade arrangements with these Latin American states, it is now openly seeking a deal with China as well. This is much harder, and likely impossible, for other member states to swallow, and in recent months, Uruguay has faced small-scale squabbles with its larger neighbors. As Mercosur is facing many headwinds, even its smallest member choosing an FTA with China over Mercosur might very well spell the end of the bloc.

Currently, the rotating presidency is held by Paraguay, a country whose president has banked on looking beyond the negotiations with the European Union. Santiago Peña has called for a quick pivot toward Asia but, unlike Uruguay, not toward China. He won the election on a platform that sought to maintain the status quo of Paraguay's recognition of Taiwan, not the People's Republic of China (PRC). However, the pressure is already on for Peña to deliver growth, not least due to a backdrop of possible constitutional turmoil due to the expulsion of an opposition senator. If an agricultural economy such as Paraguay is not to export to the PRC, the world's biggest agricultural import market, it will need access to other markets sooner rather than later. This is precisely when U.S. strategic interest comes directly into play: If there is no increased access for Paraguayan goods on the global market, the second largest economy (after Guatemala) to still recognize Taiwan may soon find itself changing tack. The EU market is by far the largest prospect for Paraguay's agricultural goods, yet it always remains just around the corner.

The Purpose of the European Union

Some policymakers have suggested that only the carrot of the EU deal even keeps Mercosur together. Less noted is the extent to which the fate of the Mercosur trade deal raises concerns for the European Union that are if not existential then at least ontological in nature: What exactly is the union good for?

The first concern has to do with the balance between the European Union's largest member states and between them and other countries. The hopes for a December agreement were scuttled by France's Emmanuel Macron. He offered, yet again, the environment as a reason, even though Brazil had reduced deforestation in the Amazon by 50 percent in 2023. Four years earlier-during the first Amazonian burning season of the Bolsonaro presidency and only weeks after the conclusion of the EU-Mercosur agreement in principle-Macron had angered many Brazilians by calling its deforestation an "international crisis" and, thus, sought to internationalize its resolution via the G7, a group to which Brazil does not belong. Then, too, Macron took aim at the Mercosur trade deal.

While Europeans would see Macron as the leader in Paris, only a short train ride away from Brussels, Brazilians are far more conscious of the fact that they-not Belgians, Germans, or the Spanish-share the longest border with France. French Guiana not only borders Brazil's Amazon region but is also home to shared EU assets, notably, Europe's Spaceport. France's economy minister has claimed full credit for the nonexistence of an agreement to the "president of the republic" and assured his domestic constituency that France retains the capacity to block the trade deal single-handedly. It can also block the European Commission President Ursula von der Leyen from securing a second term in her office.

However, the main reason why France has always been skeptical, and at pivotal moments antagonistic, towards the EU-Mercosur agreement is its agriculture. In 2024, farmers took to the streets across Europe due to a long list of grievances, with the Mercosur trade agreement one among many. The main target of these farmers is the European Union itself, especially as it seeks to limit the environmental harm of farming and to force farmers to cut their greenhouse gas emissions. The farmers also blame Brussels for the staunch price competition not only from Ukraine but also already from South America.

Thus, EU-Mercosur also presents the European Union with a fundamental question about its true nature. This is the second big concern. Is it about its internal market, with agriculture at its core, or about external trade? Half a century ago, the answer to that question was obvious as the European Community (EC, the European Union's pre-1992 predecessor) was overwhelmingly about the Common Agricultural Policy (CAP). In 1980, the CAP accounted for almost two-thirds of the EC's total budget, while today, it is less than a quarter of the European Union's. As a result of this history, European farmers are represented by a lobby that, by even the standards of Brussels, enjoys remarkable access to both the European Union's executive and legislature. By this point, the main industry body, Copa-Cogeca, has also had decades to hone its opposition to the Mercosur trade deal. European concern, especially for the impact of cattle on Brazil's environment, is hardly unfounded, but it is also part of a much more complicated picture. This includes not only ranchers but also criminal organizations and Chinese demand for soy, as well as the future of Brazil's cerrado, or tropical savannah, as much as that of its rainforests.

If Europe were to choose trade as its future, it would have a long hill to climb. The agreement would not only have to be acceptable to Europe's executives but also ratified by both the European Parliament-which may swing against trade in its early June election-and national and regional parliaments, some of which have already taken a strong stance against it. The involvement of the latter in the Mercosur trade deal has even elicited groundbreaking investigations into the role of parliaments in trade negotiations. Yet, the case for the European Union to make use of Mercosur's many strategic resources from Bolivia's and Argentina's lithium to Brazil's graphite or nickel remains strong. It is especially strong at a time when both major Mercosur and EU countries are reassessing their dependency on China, and cooperation would benefit the de-risking efforts. Less dependence on China for U.S. friends and allies to its south and across the Atlantic would also align with Washington's objectives for both parts of the world.

Conclusion

For the EU-Mercosur trade deal to be finalized and ratified, Europe would have to recommit to trade, not least to preserve its self-image of championing a rules-based and integrative international order. If the union cannot bring itself to commit to Mercosur, it is doubtful it will fare any better elsewhere in the world with a preening attitude towards the standards it demands from its partners. Deforestation and access to natural resources will remain a major item in future overtures, for example, in the direction of Indonesia. Also, if the European Union cannot do trade, how can it manage even more sensitive portfolios such as common defense production?

Right now, it looks like Brussels and, foremost, Brasília spent the best years of the erstwhile globalization consensus in protracted negotiation. The most recent idea to save some of the pact, following the example of the EU-Chile trade deal, contemplates the splitting up of its economic and political elements. Such a pure trade deal negotiated by the European Commission would only require approval in Brussels from the European Parliament and the Council of the European Union (heads of state or government of member states.) In any case, by now, it is too late for a full agreement to be ratified by all national and necessary regional parliaments before the June European elections, resulting in half a year of uncertainty in Brussels.

If the deal is dead, for now, there is a chance that it leaves behind not only a European Union that has lost much of its purpose but, more fatally, a moribund Mercosur. The death of a common market is a more final phenomenon; Mercosur has remained a constant while other South American international regimes have ebbed and flowed in recent decades. While far from perfect in driving internal or external commerce, it is a starting point from which to build prosperity in the region. For that to survive, those still working for an EU-Mercosur agreement need to make sure that their bang buries the whimper of the deal's opponents.

Lauri Tähtinen is a non-resident senior associate at the Center for Strategic and International Studies.

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