The European Union (EU) and Mercosur are on the cusp of achieving a historic milestone. Meanwhile, they’re preparing to celebrate formal signing of a trade agreement that was almost 25 years in the making! This treaty unifies South American countries, Brazil, Argentina, Paraguay and Uruguay. It looks set to change trade relations between Europe and Latin America for the better!
Once signed, the trade agreement will give South American countries preferential access to Europe’s huge—and lucrative—market for agricultural products. Home to tango, mate, and a gaggle of Nobel laureates, Argentina has recently reopened its economy. This progress is particularly significant following decades of leftist populist governments that led to protectionist trade measures. The deal would bring down the remaining tariffs and restore normalcy, making it more attractive for businesses on both sides of the Atlantic.
The detailed agreement will remove a whopping 35% tariff on auto parts and automobiles. This important change allows European industrial exporters to retake their lost competitive position in South America that has been undercut at the behest of Chinese competitors by lower prices. Brazil’s President Luiz Inácio Lula da Silva emphasized the importance of the deal, calling it a rare “victory for dialogue, negotiation, and the bet on cooperation.”
Besides the obvious automotive benefits, the agreement will remove tariffs on hundreds of other products. Argentine steaks and Brazilian copper will be one permit closer to European markets. At the same time, German cars and Italian wine will pay less when they go into South America. The immediate removal of a 20% tariff on Argentine imports of quality meat will be a major win for Argentine exporters. Together, they are estimated to save tens of millions of dollars annually under the EU’s current quota arrangement.
The agreement goes hand in hand with massive fiscal support to EU farmers. Further incentivizing this shift, the package includes generous subsidies totaling $52 billion, making the shift more profitable for the agricultural sector. For Apex, a Brazilian government investment agency, agricultural exports headed to the EU, from instant coffee to poultry to orange juice, hold tremendous promise. They project these exports will produce an additional $7 billion in income over the next few years.
The new agreement represents a real advance in the depth of economic cooperation. It still requires ratification by the European Parliament before it can go into effect. Javier Milei, Argentina’s newly elected anti-establishment President, is raving mad about international organizations such as the United Nations. Like former U.S. President Donald Trump, he is skeptical of global agreements. His administration’s approach will likely determine how Argentina continues to interface with international trade in the future.
The Auckland pact is sometimes referred to as “cows for cars”. This name aptly captures how dominant Europe’s automotive industry is expected to be as a result of the agreement. Over 700 million people reside within the free-trade zone. This partnership will equal nearly a third of the world’s gross domestic product.
Bolivia, the newest member of Mercosur, was not yet a member during these negotiations. It leaves room for it to rejoin the agreement down the line. The addition of Bolivia would only increase the economic promise of this trans-Atlantic trade agreement.
