Market Insight | Week 50
After over two decades of negotiations, the European Union and the Southern Common Market (or Mercosur as per the Spanish abbreviation), an agreement was concluded and announced by European Commission President Ursula von der Leyen at the Mercosur Summit in Montevideo earlier this month. Founded three decades ago, Mercosur is a South American trade bloc comprising Argentina, Brazil, Paraguay, Uruguay, and, as of 2024, Bolivia. Venezuela was previously a member but was suspended in 2016 due to its failure to meet membership requirements.
Pending final approval and ratification by the involved countries, this agreement sets the stage for the creation of a significant free trade area, via tariff reduction and duty-free quotas. Negotiations for the free trade zone began 25 years ago, with an initial deal reached in 2019. However, it did not finalize due to opposition from members of the agriculture sector, certain EU countries, and environmental organizations. If the agreement is ratified by the member states and the European Parliament (which requires approval from 15 of 27 EU countries), it will imply the creation of a significant free trade zone of 730 million consumers.
The agreement is structured in four phases over the next decade, aiming to eliminate over 90% of tariffs of the bilateral trade on a wide range of goods across various sectors, removing gradually high tariffs imposed by Mercosur counties on several EU imports. Indicatively such tariffs include Cars (35%), Chemicals (up to 18%) and Machinery (14-20%). The estimated benefit of tariff savings for EU exporters is over €4 billion annually.
The list of goods includes agricultural products such as corn, meat, and dairy products, industrial goods like machinery, electric vehicles, critical raw materials, including lithium and nickel and chemicals such us ethanol. After 2027, additional commodities like vegetable oils and biodiesel will be gradually integrated, with specific timelines for tariff reductions. Notably, from the end of 2025 only deforestation-free products will be allowed to enter the EU market.
In the agriculture sector, there are concerns and opposing voices from the farming industry of Europe (especially from France), for unfair competition, as the Latin American producers are not operating under the same stricter EU environmental standards, as those in EU. Same concerns are raised by several associations of EU meat industry, in view of a potential surge of Argentinian and Brazilian beef exports to EU countries.
The EU-Mercosur agreement will offer to EU the opportunity to reduce its dependence on China and Russia for critical raw materials, since Mercosur countries have large reserves of such minerals, such as lithium or nickel, which are which are essential for electric vehicles, batteries, and solar panels. The tax reductions on imports of these materials will enable the EU to diversify its sources, reducing supply risks.
In a period where protectionism is rising in several key economies around the world, the EU-Mercosur trade agreement stands out as a notable counterpoint to this trend, fostering a more open trade environment. Following the signing of the agreement and its progression through various phases, the potential for growth in bilateral trade could drive an expansion of transatlantic trade flows and a respective increase in demand for shipping tonnage in the long term.