Emerging Markets / November 26, 2019

The EU-Mercosur Trade Deal: A Win for Latin American Exporters

On the June 28th, 2019, the European Commission and representatives of Mercosur signed a provisional free trade agreement which if successful could see a significant surge in trade between the two blocks. The deal has been 20 years in the making and is potentially the biggest FTA negotiated by either party, covering a population of 780 million and part of a wider range of talks between the two blocks.

Mercosur countries include some significant agricultural exporters such as Brazil (the world’s number-one beef exporter) and Argentina (the world’s number-one lemon exporter), who are looking to gain access to high-value European markets for agricultural products.

What would be some of the implications for farmers and others in Mercosur and Europe?

An agreement would certainly boost beef exports from Brazil to the EU, and it’s not surprising that France and Ireland—the EU’s leading beef exporters—have voiced opposition to the agreement. An EU-Mercosur deal could see this trade grow significantly and is a real opportunity for Latin American producers.

Tropical fruits are a growing niche market in Europe and the Mercosur countries have a production window suited to supplying produce to European countries during the winter, when local supplies are short. Brazil is the largest producer of orange juice in the world, and there is potential for increased lemon exports from Argentina also. Mercosur exports of popular products like avocado, pineapple, and lime are also likely to expand.

The EU agri-food sector will see a reduction in existing Mercosur tariffs on EU products such as chocolates and confectionery (20%), wines (27%), spirits (20 to 35%), and soft drinks (20 to 35%). The agreement will also provide duty-free access for EU dairy products (currently 28% tariff), notably for cheeses.

Fruit and vegetable producers in the Netherlands would certainly like to export more to Mercosur; however there are significant non-tariff barrier currently in place preventing trade, such as phytosanitary regulations. Agricultural Economists at Wageningen University in the Netherlands forecast that the removal of regulatory differences between Mercosur and the EU could offer some opportunities for Dutch exporters.

While a deal would lead to significant reductions in tariff barriers to trade, it is the changes to Non-Tariff barriers which are likely to have the biggest impact. However, researchers at the London School of Economics (LSE) have forecast that under conservative scenarios for a deal, there would be a 0.5% reduction in the EU fruit and veg sector, but a 1.9% gain for Brazil, 3.1% for Argentina and a 2.2% gain for Uruguay. These predictions have led to concerns that the agreement is one-sided.

If finalised, the agreement could see some significant shifts in global trade in farm and food products. But this is far from certain; there is strong opposition from the environmental and indigenous rights groups as well as the agricultural lobbies in Europe. There is also opposition from Austria, where the parliament has voted against the deal as it stands, as well as from France and Ireland. The deal must be approved by all parliaments within the EU, by the EU’s Commission and Parliament.

Mercosur has a comparative advantage in terms of the production of agricultural products, but there are many who are fearful of the EUs strength in terms of industrial products. Since the deal was announced during the summer of 2019 – opposition has grown, and there is a good chance that the deal will be substantially revised before it is ratified.

Despite 20 years of talks, an FTA between the EU and Mercosur is still an uncertain prospect, but if compromises can be made then the agreement would provide some opportunities for both Latin American and European producers.