The announcement at the December 5-6 summit of the Southern Common Market—Mercosur—that a trade agreement with the European Union (EU) had been reached came as a surprise to many, as negotiations had dragged on, seemingly without success, for twenty-five years. We can expect the path to its ratification and implementation to be tortuous, as affected business sectors make their cases either for or against it. In any event, the conclusion of the agreement is revealing political fault lines within both the EU and Mercosur. It will also have broader strategic implications as China seeks to penetrate South America economically while the United States remains on the sidelines.

Mercosur, the trading bloc which consists of Brazil, Argentina, Uruguay, and Paraguay, was created in 1991 with a structure that parallels that of the EU in requiring its member states to adopt a common external tariff. This distinguishes it from other trade areas, such as that established by the U.S.-Mexico-Canada Agreement (USMCA, formerly known as NAFTA), in which member states are free to negotiate tariffs with third countries individually.

A Long Time Coming

In 1999, the two huge trading blocs (the current EU population is 449 million, and the Mercosur population is 295 million) committed themselves to reaching a free trade agreement. But negotiations proved to be difficult as the Mercosur countries were concerned about pressure from EU industrial exports, and several EU states feared tough competition from Mercosur agricultural producers.

A draft agreement was reached in 2019, but it stalled out amid European complaints of inadequate environmental protection, especially as regards Amazon deforestation. And, while European publics are indeed environmentally conscious, it is also true that these concerns were highlighted by those European governments already looking to respond positively to their own agricultural sectors’ strong pushback against the accord.

Seeking to make the agreement more palatable in Europe, Mercosur has now agreed to tighter environmental requirements, including a binding commitment to halt illegal deforestation by 2030. Also, one party to the agreement will be able to suspend the agreement in whole or in part if environmental commitments are not met by the other. Commercially, it covers a broad range of sectors, with the concerns of the most sensitive businesses addressed by varying phase-in periods. The agreement also retains provisions on political dialogue and developmental assistance, which had been included in the earlier version.

Love It or Hate It

The EU-Mercosur agreement has been opposed consistently by France, which has a large, militant agricultural sector that has enjoyed decades of subsidies and protection. President Emmanuel Macron has made it clear that Paris will vote against ratification, stating that France will “tirelessly defend our agricultural sovereignty.” And in an apparent gesture of support for French agriculture, retail giant Carrefour went so far as to announce that it would not sell meat sourced from the Mercosur countries in France. (It had to walk this statement back in the face of a threatened boycott of its stores in Brazil.)

However, pressures against the agreement in Europe do not necessarily mean that it is doomed. Taken as a whole, it is true that the agreement would need unanimous consent from the EU member states to come into effect. Yet, it has been suggested that the trade-related element could be handled separately. Having been negotiated by the European Commission, it still would have to be approved by EU trade ministers meeting in the European Council, but it could only be blocked if four countries representing 35 percent of the EU population were to oppose it. Approval by a majority vote in the European Parliament would also be needed to bring it into force.

In addition to France, Poland, where agricultural interests are also strong, has indicated opposition to the agreement, but alone, the two states will be unable to block it, while Germany, Spain, and several smaller EU member states have already indicated their support for it. Thus, the opposing states will need to gain significant additional voting power, possibly from Italy, which has not yet made its views clear.

Support is stronger among the Mercosur countries. Brazil, Argentina, and Uruguay have powerful export-oriented agricultural sectors, such as soy, wheat, and beef cattle production, which covet access to the vast, wealthy European market. (Paraguay, the least developed of the Mercosur states, is more wary of the agreement, but as the smallest of the bloc’s members, it is in no position to stop it from going forward.)

The industrial sectors within Mercosur, created in the era of import substitution and oriented to domestic markets, have been battered for decades by Chinese competition and lack the political clout to hold back the agreement. The Brazilian auto sector, for which Mercosur is a captive market, is a special case. Big European manufacturers such as Volkswagen will be able to sell more vehicles into the Mercosur countries, but a measure of protection will be maintained through a lengthy phase-in period of fifteen years, with eighteen years for electric vehicles.

Reshuffling the Deck Inside Mercosur…

Aside from the purely economic consequences stemming from the agreement, it is creating political impacts within the two blocs. A big winner is Brazilian President Luiz Inácio Lula da Silva. The accord between the European Union and Mercosur had languished under his predecessor, Jair Bolsonaro, a climate change skeptic who oversaw a dramatic increase in the destruction of the Amazon rainforest and the tropical savanna as land was converted to agricultural uses.

Lula, although certainly sensitive to agricultural concerns (especially as his own Workers’ Party does not command a majority in Congress on its own), has taken stronger positions on climate change at international fora, and rainforest destruction has slowed since he took office in January of 2023. While Lula’s record is hardly spotless, his credibility on these issues has given some welcome political cover to European supporters of the trade agreement, although hardcore environmentalists remain staunchly opposed to it.

More broadly, the conclusion of the treaty has given Lula a win. Since returning to office for a second term after a twelve-year gap, he has sought to reclaim Brazil’s (and his own) place as a global leader. However, he has faced frustrating setbacks. His attempt to revive the moribund Union of South American Nations met with minimal interest among other regional leaders. His desire to play a role in negotiating an end to the conflict between Russia and Ukraine was ignored by the parties. His efforts to persuade Nicolás Maduro to allow a transition to democratic rule in Venezuela following the July 2024 election were unsuccessful. Bringing the negotiation with the EU to a successful end breaks this streak of failures.

Argentine president Javier Milei has come to the agreement from a different angle. He is a committed believer in free market economics, so it is within his comfort zone. And the agreement’s outcomes are consistent with his predilections for reforming Argentina’s own economy. He is supportive of agriculture, which is relatively efficient and historically the main source of Argentina’s wealth, and has reduced the onerous taxes on the exports that hinder it. By contrast, he is skeptical of Argentina’s domestically oriented industrial sector, which he sees as having “robbed the countryside” by benefiting from subsidies and favorable treatment on taxes and access to foreign exchange.

While supporting the treaty, Milei used the occasion as an opportunity to press for reform of Mercosur itself, which he asserted has become a “prison” in which its member states have isolated themselves from the world. He demanded that individual members be allowed to negotiate trade agreements with third countries, a position which Brazil, committed to the common external tariff, opposes, insisting that any negotiations be undertaken as a bloc.

Milei’s position was shared by Uruguayan president Luis Lacalle Pou, who has chafed at Brazil’s stance. Uruguay has undertaken preliminary discussions with China over a free trade agreement, although the talks have not reached the point where it would have to confront Brazil over its desire to negotiate independently. However, the conservative Lacalle Pou is in his last months as Uruguay’s president. His recently elected successor, center-leftist Yamandú Orsi, has spoken of the need to work together with Uruguay’s Mercosur partners in any further negotiations.

…and the European Union

The conclusion of the agreement has implications within Europe as well. Germany, the EU’s industrial powerhouse, will eventually gain greater access for its manufacturers. This is especially important as its economy has faltered of late. And its businessmen, who had placed large bets on Russia after the fall of communism, are facing the loss of this market in the aftermath of the invasion of Ukraine. While it may take time to materialize, the prospect of new market access from Mercosur may be a comfort in a difficult moment.

Another country that can take satisfaction from the new agreement is Spain, which has always seen itself as a bridge between Europe and Latin America. Spanish businesses, particularly those in banking, aviation, and telecommunications, bet heavily on Latin America in the 1990s, only to retreat after political and economic turmoil led to poor results. Nonetheless, the region retains a certain attraction for them. And while Spain does not have an indigenous automobile industry, German and other European manufacturers have built plants there, making it Europe’s second-largest automaker; Spanish workers may eventually benefit from future sales to the Mercosur countries.