G20 summits rarely produce breakthroughs in world affairs, but the latest one, held in Osaka in June, was an exception: the four founding members of Mercosur, a South American trading bloc, and the EU announced that they have reached a provisional deal that could exponentially increase trade across the Atlantic.
Mercosur comprises Argentina, Brazil, Paraguay and Uruguay. The scale of the proposed deal with the EU will create a transatlantic market of nearly 800 million consumers, accounting for nearly a quarter of the world’s GDP.
It’s a deal
The agreement is a meeting of minds between two giants of global trade. Together, the two trade blocs account for a little less than 20 percent of the world’s trade.
In an era of rising populism, centrist leaders see trade liberalisation as a great opportunity for Europe’s trade prospects
Experts have dubbed the agreement a typical ‘food-for-cars’ deal. While European manufacturers are keen to tap into Latin American markets, Mercosur boasts a robust agricultural sector with limited access to European markets due to tariffs on products such as pork, sugar, ethanol and beef. The two blocs will lift or reduce tariffs on a wide range of goods, although services will be largely excluded. Tariffs on EU products exported to Mercosur are expected to decrease by over €4bn ($4.42bn).
Better late than never
But if the deal is mutually beneficial, why did it take two decades for it to be agreed upon (albeit provisionally)? The answer lies in domestic politics on both sides of the Atlantic. Governed by socialist governments at the beginning of the 21st century, Argentina and Brazil followed inward-looking economic policies, shunning trade liberalisation. Venezuela joined the group as a full member in 2012, only to be ousted four years later.
The political climate changed around the same time, when new governments elected in Mercosur countries were more willing to reform existing trade restrictions.
For its part, the EU demanded concessions in non-agricultural markets and services that the South American bloc was not willing to offer. Powerful interest groups representing the European farming industry blocked any progress through fierce lobbying, claimed Julio Nogues, an economist who previously served as Argentina’s trade representative to the US. Pressure from South American manufacturers was even fiercer, according to Nogues: “For these groups, there has never been an interest in signing trade agreements and particularly with highly advanced, industrial and competitive countries like the EU ones.”
The EU’s negotiating approach was heavily influenced by the concurrent negotiations between the US and the South American bloc, according to Dr Felicitas Nowak-Lehmann, a trade expert at the Ibero-America Institute for Economic Research, University of Göttingen: “When the US lost interest in the Free Trade Area of the Americas in 2003-04, the EU lost interest in negotiating with the Mercosur as well.”
This changed after 2016, when the US shifted to a protectionist stance following the election of President Trump, opening the way for the EU to adopt a different approach, said Dr Claudia Schmucker, a trade expert at the German Council on Foreign Relations: “The external factor of Donald Trump was decisive in finalising the agreement. The EU and the Mercosur countries realised that they had much to lose due to the current US trade policy.”
In an era of rising populism, centrist leaders see trade liberalisation as a great opportunity for Europe’s economy. The EU will also be keen to avoid a debacle like the protracted Transatlantic Trade and Investment Partnership (TTIP), a US-EU trade agreement that has been effectively shelved due to public discontent in Europe, and President Trump’s reforms to US trade policy. The prospect of a similar backlash to TTIP accelerated the signing of the agreement with Mercosur, Nogues told World Finance: “In the EU, fears of leaders over a growing nationalist sentiment in Europe must have been a factor in endorsing this draft [of the agreement].”
What’s the beef?
Although formal negotiations between the two blocs concluded in June, the process of implementing the agreement is far from over. Ratification, by national parliaments on both sides of the Atlantic and the European Parliament, is far from certain. The announcement of the deal has raised concerns in countries with strong agricultural sectors, such as France and Ireland, which fear competition from Mercosur producers.
Copa-Cogeca, a lobby group representing European farmers, sent an open letter to the European Commission warning against double standards on food safety that may create unfair competition for European producers.
Approval by EU member states should not be taken for granted, Schmucker said: “The real challenge will be the national parliaments. It will take years to ratify – if ever.” Schmucker pointed to the Canada-EU trade agreement as an example of a long ratification process that encountered several obstacles, including a last-minute rejection by Wallonia’s parliament. This could be repeated, Schmucker told World Finance, with strong opposition coming from agricultural and environmental groups across Europe. Ratification may also be hindered by the French political calendar, with President Emmanuel Macron potentially being pressured by powerful lobbies as the presidential election approaches in 2022, said Gaspard Estrada, Executive Director of the Political Observatory of Latin America and the Caribbean at Sciences Po University.
In South America, Alberto Fernández, an ally of the former president Cristina Fernández de Kirchner, is the favourite to defeat the current pro-business president, Mauricio Macri, and win the second round of the general election at the end of October. A Fernández government would be bad news for the deal, said Nogues: “Based on the recent experience of the Kirchner government, there is little doubt that Argentina will opt out from the agreement.” However, if rejected by one or more Mercosur country, Nogues noted, the agreement is likely to enter into force bilaterally.
To sweeten the pill of trade liberalisation for threatened sectors, negotiators incorporated into the deal provisions for the gradual lifting of barriers, such as phase-in periods and quotas. Brazil, one of the largest beef producers in the world, will benefit from an export quota of 99,000 tonnes of beef at a 7.5 percent tariff, but this will be phased in over five years. The EU has also pushed for high food safety standards, which most Mercosur countries will find difficult to meet. “There is more than enough time for protected industries in Mercosur to adjust and for governments to remove unnecessary regulations that make this part of the world quite inefficient,” Nogues said. “While [these] remain… industrialists will keep rejecting the agreement, and in Argentina, the next government is likely to listen to them.”
Stoking the fire
One of the most contentious issues around the deal is its impact on the environment – a topic that is expected to feature higher on the agenda of trade negotiators in the future. Brazil’s President Jair Bolsonaro is one of the world’s most prominent climate change sceptics; his government has often been accused of abetting illegal logging, burning and land invasion. Critics also point to human rights abuses against the country’s indigenous tribes.
Deforestation in the Amazon, a region known as ‘the lungs of the world’, hit a new record this summer with an area the size of three football fields being lost every minute, according to the DETER-B satellite monitoring system. Critics of the Bolsonaro government have publicly threatened to block the deal in the European Parliament. In March, a cross-party group of MEPs signed a letter to the EU trade commissioner, warning that they would not vote for the agreement unless there are guarantees that Brazil meets its commitments under the Paris climate agreement, and safeguards the rights of indigenous tribes.
Dr Molly Scott Cato, an environmental economist and MEP for the UK Green Party, told World Finance: “The shocking increase in destruction of the Amazon rainforest under Bolsonaro’s watch is now indisputable. The EU must put its rhetoric into action and make climate action and human rights a precondition to signing off the Mercosur trade agreement.” Protecting European farmers from unfair competition is also important, Cato added: “The EU must not accept lower environmental, pesticide, traceability and animal welfare standards, as these will threaten to undermine European farmers.”
Brazil’s lukewarm reaction to unprecedented wildfires in the Amazon region this summer has also stoked the flames of discontent against the Bolsonaro regime. France and Ireland have threatened to block the deal unless the Brazilian Government does more to guarantee the protection of the rainforest, with the French president directly accusing Bolsonaro of lying about the country’s climate commitments in Osaka. Environmental concerns are warranted, Schmucker said, but ditching the deal might backfire: “The question is whether the EU has more leverage with a trade agreement or without. The Brazilian president… promised at least to stick to the Paris climate agreement. And the EU has at least some kind of influence through this agreement, whereas other countries such as China have fewer qualms about importing ore, meat and soybeans produced through questionable [standards of] production or exploitation.”
The fight for free trade
For the outgoing Juncker Commission, the agreement may be the crowning achievement of an aggressively pursued trade agenda over the past five years. Spearheaded by the energetic trade commissioner Cecilia Malmström, the commission led the negotiations that produced deals with some of Europe’s most important trading partners, such as Canada and Japan.
If ratified, the deal will cement the EU’s role as a bulwark against US protectionism. The timing of the announcement couldn’t be more fitting, as the repercussions of the US’ unilateral approach to trade become clearer and clouds gather over the world economy. Under Donald Trump’s leadership, the US has repeatedly threatened the EU with tariffs on products such as cars and cheese, accusing Germany of currency manipulation. Trade experts believe the Mercosur deal could allow the EU to replace some of the ethanol, beef and cereal it imports from the US, while its own car industry would tap into South American markets as a response to potential US tariffs. Diversification is also a goal for Mercosur countries, Estrada said, given Brazil and Argentina’s increasing reliance on trade with China.
The message to the US is clear, said Dr Stephen Woolcock, head of the LSE’s International Trade Policy Unit and former consultant to the European Parliament and the European Commission: “Free trade agreements are important as a second-best option at a time when the US is eroding the existing system and China [is] not helping develop it. The signal is that the EU is still negotiating and concluding important trade agreements.” Through these deals, the EU – often accused of being protectionist – is projecting its image as a champion of free trade, added Woolcock: “These are second-best to a multilateral order, but they are at least supportive of a progressively open rules-based system in which parties cooperate and reach an agreed position. This contrasts with the US’ power-based approach to trade, which is to threaten the closure of existing market access unless trading partners make concessions.”
By supporting the establishment of global supply chains, trade agreements such as these can help the EU win the competition against the US and China to set trade and industry standards. The EU is keen to sustain the so-called ‘Brussels effect’ – an informal regulatory process through which the bloc can effectively impose its own rules on industries, such as chemicals and agriculture, due to the sheer size of its market. The deal with Mercosur may boost the EU’s role in setting trade standards, Schmucker said: “The EU sends a signal that – despite all the internal problems – it is still a global player in trade. While the US focuses on ‘America first’ and increasing trade protectionism, the EU is able to open markets and to develop modern trade standards and norms worldwide.”
The UK will lose the benefits of the Brussels effect if it leaves the EU with a no-deal Brexit in October, as the country will not be able to reap the benefits of agreements that the EU has signed with trade powerhouses such as Mercosur, Canada and Japan. The EU-Mercosur deal serves as a stark reminder of Brexit’s detrimental effect on the UK’s leverage in global trade, Schmucker said: “The UK will have major problems after leaving the EU as it will lose the appeal of the common European market with about  million consumers. In a world where market power dominates trade negotiations, the UK as a single country will have a hard time negotiating trade agreements without making major concessions.”