Negotiations for a free trade agreement between Mercosur, a trading bloc of five Latin American countries, and the European Union (EU) have spanned for nearly 25 years since the beginning of negotiations in 2000. In 2019, both parties announced having reached an agreement, but it has since remained in limbo. A conclusion finally seems to be on the horizon for what will be one of the largest free trade agreements (FTA) in history, covering some 750 million people and representing one fifth of the global economy. Despite the size of the EU and Mercosur, the deal represents a somewhat unlikely economic alliance. Over recent years, China has overtaken the EU as a primary trading partner for Latin America, and conservative estimates place the benefit to exporters at less than 0.1% and less than 1% of GDP for the EU and Mercosur respectively, reflecting a rather limited immediate economic impact. Further complicating ratification, both trading blocs would have to make concessions in historically protected industries. Nonetheless, the deal is a strategic response by the EU and Mercosur to diversify their trade networks and reduce their dependence on China.
Complementary Economies and Strategic Gains
The economies of the EU and Mercosur compliment each other in several key ways. Latin America’s manufacturing industry is relatively weak and uncompetitive, hurt by years of protectionist policy and China’s rise as a manufacturing powerhouse. In comparison, the EU has some of the most developed and efficient manufacturing industries in the world. A trade deal would grant European companies access to Latin American markets, offering consumers a broader selection of goods at more competitive prices while pushing Mercosur’s manufacturing sector toward greater efficiency. Agriculture, however, remains Mercosur’s primary export. In 2018 alone, Mercosur exported $8 billion worth of agricultural products to the EU. With privileged access to Europe’s highly protected agricultural market, exports could significantly increase, benefiting farmers across the region.
Concessions and Bloc Fragmentation
Both sides of the EU-Mercosur trade deal face major concessions and domestic opposition. The EU’s agriculture sector receives massive subsidies and benefits from high external tariffs under the Common Agricultural Policy (CAP), one of the EU’s foundational purposes, and which still accounts for a significant portion of its total budget. Rolling back these CAP protections could jeopardize decades of agricultural investment and leave European farmers vulnerable to foreign competition they are ill-equipped to handle. This has sparked protests from farmers and vocal opposition to the deal, particularly from France. To ease these concerns, the EU set aside money to compensate farmers for the potential losses.
Resistance also exists within Mercosur, especially from member countries like Bolivia, who trades in Yuan and has received billions in Chinese investment. Uruguay, too, has expressed skepticism, pushing instead for an agreement with China.
Escaping Chinese Influence
The overarching value of the deal lies in its potential to increase economic independence. Both the EU and Mercosur aim to reduce their reliance on China and to gain leverage in global trade, including with the United States. The deal, which heavily reduces tariffs on industrial products and agriculture on both sides, would also open the door for more European foreign direct investment into Latin America, a very promising export market in which the EU is already a leader and a key funder of greenfield projects. Ideally, it would incentivize European firms to relocate their production lines from China to Latin America, reducing dependency on Chinese manufacturing.
Latin America’s wealth of natural resources, which includes critical raw minerals needed for the EU’s green energy transition, makes it an attractive partner as Europe seeks to diversify its supply chains, currently dominated by China. With European imports from China continually increasing, securing new resources has become a priority for European leaders. Some Mercosur countries have sought diplomatic independence from China, like Paraguay which maintains its recognition of Taiwan. For them, access to the EU’s agriculture market offers a crucial alternative to China’s, the world’s largest market for agricultural imports.
Shifting Alliances and the United States
For its share, the United States has been a somewhat unpredictable trading partner. Tariffs proposed by former President Trump would affect European firms on a broad scale. The Inflation Reduction Act offered Americans tax breaks for certain products as long as they are made in North America, which the EU characterized as illegal discrimination against foreign exports. In Latin America, the United States has to some extent receded diplomatically, more concerned with other issues and regions. The U.S. lacks trade agreements with Mercosur countries and its relatively declining role as primary trade partner for the region has left a vacuum increasingly filled by China. Indeed, 21 Latin American countries have joined the Belt and Road Initiative and many have established free trade agreements with Beijing.
If ratified, the Mercosur-EU FTA would have a significant impact on the global economy, underscoring shifts in the geopolitical landscape. As the U.S. works to revitalize domestic manufacturing and distance itself from China, it has inadvertently pushed its trade partners toward increasing their engagement with Chinese imports and investments. While Washington may welcome the EU-Mercosur deal as a step to reduce the growing influence of China in the global economy, it also highlights the need for the U.S. to strengthen its economic support to its allies, a critical avenue to counterbalance Beijing’s growing influence.
Edited by Flore Lemaire
The opinions expressed in this article are solely those of the author and they do not reflect the position of the McGill Journal of Political Science or the Political Science Students’ Association.
Featured image by Global Americans