Why not everyone’s happy with the EU-Mercosur deal

After 25 years of negotiations, the EU and Mercosur have finally sealed the deal. The agreement between Europe and Argentina, Brazil, Paraguay, and Uruguay will create one of the world's largest free-trade zones. It will be signed on Saturday, but still faces strong opposition, not least in France.

A positive signal for global trade

The new trade deal will establish one of the world's largest free-trade zones, covering more than 700 million people and representing 20% of global GDP. The agreement sends a strong signal in support of open markets at a time when global trade faces rising protectionism. It provides the EU with new channels to diversify trade routes away from the US and China and strengthen its presence in a resource-rich region. The Mercosur bloc comprises Argentina, Brazil, Paraguay, and Uruguay. Bolivia is also a member but not a party to the agreement.

The fight is not yet over

The signing, originally planned for last year, was delayed due to concerns about environmental protection and strong opposition from several countries, including Italy and France, which feared negative impacts on their agricultural sectors. The EU introduced additional safeguard measures and sweeteners for European farmers, ultimately securing the support of Italian Prime Minister Giorgia Meloni. This breakthrough enabled EU ambassadors to secure the required majority at last Friday’s meeting without France's consent. The President of the European Commission will officially sign the agreement on Saturday in Paraguay.

However, the fight is not yet over. The European Parliament (EP) will need to vote on the deal for the treaty to take effect. Some parties within the EP are pushing to refer the agreement to the Court of Justice, which could freeze progress for up to 18 months.

From tariffs to trade: Implementation is a lengthy process

Trade between the EU and Mercosur faces significant tariff barriers, making many goods costly to export or import. The Agreement eliminates tariffs on around 91% of goods traded between the blocs. This would, for example, reduce the trade-weighted effective tariff rate on EU exports to Argentina from 10.3% in 2024 to approximately 1% over time. Current tariffs can be as high as 35% for auto parts and cars or 28% on dairy products. The removal of these tariffs will save approximately $4 billion and will take effect gradually, with a timeline dependent on the specific product. Mercosur tariffs for car parts, for example, will be eliminated linearly over a course of ten years after signing, whilst the EU will create an additional tariff rate quota for beef over the next five years.

The agreement consists of two separate legal instruments. Firstly, the interim Trade Agreement (iTA) focused exclusively on trade matters. The iTA will enter into force once approved by the European Parliament and concluded by the Council by qualified majority.

Secondly, the EU-Mercosur Partnership Agreement (EMPA) with a much broader scope. It covers political dialogue, cooperation, investment, and environmental provisions in addition to trade. Full implementation requires ratification by all 27 EU member states, following national procedures – a process that can take years. Once EMPA enters into force, it will replace the iTA.

To mitigate delays, the European Commission proposed the provisional application of certain EMPA provisions, especially the political and cooperation measures. Past experience shows that the ratification process can be quite slow. For example, the EU-Canada Agreement (CETA) has been provisionally applied since 2017, yet only 17 of 27 member states have ratified it. Delays in CETA’s ratification largely stem from comprehensive investment provisions, which are less pronounced in the EMPA. However, further discussions on EMPA could arise due to ambitious sustainability commitments.

Trade flows between EU and Mercosur members

in € billion.

Source: European Commission, Eurostat

Symbolic and geopolitical value outweigh economic impact

EU exports to Mercosur states surged strongly until 2022, then stagnated at around 55 billion euros in 2023-2024. The agreement could lead to higher exports, as the removal of tariffs makes it more affordable for Mercosur consumers to import goods from Europe. On the other hand, imports from Mercosur could also go up, although the import value is susceptible to fluctuations in agricultural commodity prices. The elevated import value in 2022, for example, was partially caused by high soybean prices.

The deal goes beyond simple economics

Despite these trade benefits, the overall economic impact remains modest. EU GDP is projected to increase by 0.1% by 2032 from the trade agreement, and the gains will not be evenly distributed. Countries with strong agricultural sectors, such as Spain and Italy, are expected to benefit more than others. For Mercosur, the boost is slightly bigger at 0.3% additional GDP growth over the same period. Additional impacts may follow as some tariffs are phased out later.

However, the true value of the deal goes beyond simple economics. For the EU, this is not just about trade - it’s about securing strategic resources and counterbalancing global competitors. From a geopolitical perspective, it sends strong signals to the US and China that efforts are being taken to reduce trade dependencies and that the EU is actively working on strategic autonomy. The momentum from this trade deal should be leveraged to accelerate negotiations for other trade deals, such as the EU-India agreement, which was already close to completion a year ago. In our view, the Mercosur deal strengthens the EU’s credibility as a global trade actor and creates a window of opportunity to finalise agreements that have been stalled for years.

Continued opposition leads to additional commitments to farmers

Agri and food products account for the largest share of the EU’s imports from Mercosur, with a total import value of €24 billion in 2024 (43% of total imports). The agreement will facilitate trade growth by increasing import quotas and reducing or eliminating tariffs on products such as beef, poultry, and sugar.

Discontent among EU beef, poultry, and sugar beet farmers has been mounting, given that the deal will increase competition with Mercosur farmers who can operate at lower costs and to different standards. The EU Commission’s response includes additional commitments to farmers, such as:

1. Safeguards that allow the suspension of preferential tariffs if a surge in imports leads to a drop in EU prices of sensitive products.
2. A plan to set up a €6.3 billion crisis fund for agriculture in the next EU budget, and.
3. The redirection of €45 billion from a flexible reserve in the next EU budget towards agriculture and rural development.

By doing so the EU commission traded more export opportunities for less flexibility in the 2028-2034 budget.

Meanwhile, other subsectors within the food industry are more supportive. Total EU agrifood exports to Mercosur were worth 3.3 billion in 2024, and the deal provides better market access for high-value products such as cheese, olive oil, wine and spirits. Since those products are facing US tariffs, better market access elsewhere will help exporters diversify by building additional supply chains and distribution networks. Then there are EU food and beverage manufacturers that could benefit from lower input costs, such as meat processors, confectionery companies, and soft drink manufacturers.

Long awaited success for struggling EU automotive sector

The trade agreement brings some light to the darkness for the struggling European car industry. Current tariffs of up to 18% on auto parts and up to 35% on cars are clearly not conducive to export prospects. Mercosur is a growth market for cars, unlike Europe. Mercosur countries sell more cars than they produce domestically. Carmakers in Brazil and Argentina produce vehicles for other Latin American countries, but Mercosur countries also rely on car imports to meet domestic demand.

EU countries exported €1bn of passenger cars to Brazil, the bloc’s largest market, in 2024, with Germany accounting for 70%. By comparison, car exports to China totalled €14.5 billion. Altogether, EU countries exported €5bn worth of vehicles and automotive parts to the Mercosur member states (with Germany covering 42%). So far, European brands such as Fiat, Volkswagen, and Renault haven’t faced significant Chinese competition in Latin America, but that is changing. Chinese brand BYD now holds a 4% market share in Brazil, up from 0% in 2020, and is increasing local production. Fiat has a 21% market share in Brazil, while Volkswagen holds 17%.

Critical raw materials – A key element in the deal

While critical to the EU’s economic future, raw materials such as lithium have received relatively little attention in coverage of the free trade agreement. That’s surprising, given that: a)

• The EU is highly dependent on China for critical raw materials,
• Mercosur countries such as Argentina and Brazil hold large reserves of several of these critical raw materials, and.
• EU demand is expected to rise sharply.

We've previously written about how demand for lithium batteries, which power electric vehicles and energy storage, is set to increase 12-fold by 2030, while the bloc’s demand for rare earth metals, used in wind turbines and EVs, is set to rise five to six times over the same period. The EU-Mercosur agreement is designed to improve supply chain security, diversify sourcing, and facilitate EU investment in local processing industries, while maintaining high sustainability standards and predictable trade rules. Mercosur countries are major producers of key critical raw materials, including lithium, niobium, tantalum, and natural graphite, making the partnership strategically important for Europe.

By strengthening ties with Mercosur, the EU is inserting itself into an increasingly competitive race for critical raw materials alongside China and the US. It supports Europe's de-risking strategy from China, while introducing an element of allied competition with the US in Latin America. It highlights how access to critical raw materials is becoming a key pillar of global power competition.

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