EU Signs Landmark South American Trade Deal

Written by Martin Lynch, European News Editor for IIR News Intelligence (Sugar Land, Texas)

Summary

The European Union (EU) has concluded its largest-ever free trade agreement with key South American countries, eliminating import tariffs on a wide range of goods and opening the way for Europe to secure critical raw materials and rare earth minerals in the future.

A Deal 25-years in The Making

It has taken almost 25 years but the European Union (EU) has signed its largest-ever free trade agreement with an alliance of key South American countries, which will affect trade across many key sectors from agriculture and cars to pharmaceuticals, renewable energy and critical raw materials. 

The EU signed the deal with the Mercosur (Southern Common Market) trading group, comprising Brazil, Argentina, Paraguay and Uruguay, despite stiff opposition from some EU Member States and widespread protests by the agricultural sector. It will create a trading bloc made up of 31 countries and more than 700 million consumers. The EU and Mercosur account for up to 25% of global gross domestic product (GDP), and the deal will eliminate tariffs on more than 90% of bilateral trade. EU businesses exporting goods including agri-food and industrial products such as cars, machinery, and pharmaceuticals will save up to 4 billion euro (US$4.7 billion) worth of duties per year.

A Vital Deal in an Uncertain World

Mercosur is the sixth largest economy outside the EU with an annual GDP of 2.7 trillion euro (US$3.2 trillion). According to the European Commission (EC) the two economies are complementary: Europe needs secure access to the raw materials that underpin the clean transition, while Mercosur countries need access to more investment and technology. The EC claimed the deal demonstrates the EU and Mercosur's shared commitment to "multilateralism and the rules-based international order. At a time of global uncertainty and increasing fragmentation, this agreement underlines the value of cooperation, dialogue and international partnerships." 

What is Mercosur?

Mercosur translates as the Southern Common Market and was formed in 1991, some years after key founding members Argentina and Brazil overthrew dictatorial regimes. The goal was to create a common market, spur development and bolster democracy. In its first decade, it saw a tenfold increase in trade within the bloc and it has spent the intervening decades trying to foster greater international links. The deal with the EU is the result of almost 25 years of on-off negotiations that have been hampered by agricultural backlash in Europe, political tensions in South America and environmental concerns over the widespread deforestation of the Amazon rainforests.

European Commission President Ursula von der Leyen said: "Today, two like-minded regions open a new chapter of opportunity for more than 700 million citizens. With this win-win partnership, we both stand to gain -- economically, diplomatically and geopolitically. Our companies will create exports, growth and jobs. We will support each other in our clean and digital transitions. And our signal to the rest of the world is clear: the EU and Mercosur are choosing cooperation over competition, and partnership over polarisation."

How the Deal Will Work 

Over the coming decade, Mercosur will remove import duties on 91% of imports from the EU, with industrial exports like cars, machinery, chemicals, and pharmaceuticals benefitting from substantial tariff reductions. Tariffs on EU food and beverage exports, including chocolate, wine and spirits, will be gradually phased out, with new quotas introduced for many dairy products. For its part the EU will eliminate tariffs on 92% of imports from Mercosur, but specific tariff rate quotas will be put in place for high-value and contentious goods like beef, pork, poultry and sugar. 

A Promising Deal for Critical Minerals

Europe needs access to critical raw materials and rare earth minerals to reduce its almost complete reliance on China and Russia for certain critical components. Mercosur countries like Brazil have massive, untapped resources. Today, the EU imports 82% of its Niobium, which is needed to produce superconducting magnets for MRI scanners and cancer treatment, from Mercosur. According to consultants PriceWaterhouseCoopers, Brazil ranks among the top 10 producers of nickel, manganese, niobium, iron and bauxite, and has been expanding its relevance through the rapid growth of its production of lithium, natural graphite, rare earths, vanadium and copper. Industrial Info is tracking almost 700 mining and processing projects in Brazil worth more than US$51 billion in investment. Subscribers to Industrial Info's Global Market Intelligence (GMI) Project Database can click here for the reports.

EC President von der Leyen noted the importance of Brazil's resources in this regard: "Europe and Brazil are moving toward a very important political agreement on critical raw materials. It will frame our cooperation on joint investment projects in lithium, nickel and rare earths. This is key for our digital and clean transitions. And also, for our strategic independence in a world where minerals tend to become an instrument of coercion."

Mercosur Opposition and Legal Challenges

France, Ireland, Austria, Hungary and Poland voted against the deal, claiming it represented a massive threat to their farming industries, especially in relation to allowing more imports of cheaper South American meat and poultry. Since the deal was signed the European ⁠Parliament has voted to refer the free trade agreement to the EU's top court. This could potentially slow down the ratification of the deal by two years or, at worst, derail it. It is likely that the EC will move ahead with the deal on an interim basis despite the legal challenge.  

Key Takeaways

• The European Union (EU) has signed its largest ever free trade agreement with an alliance of South American countries.
• The controversial deal will eliminate tariffs on more than 90% of bilateral trade.
• A key part of the deal will involve the EU securing new sources of critical raw materials and rare earth minerals from Brazil.

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