After 25 years of back and forth negotiations, the European Union (EU) and the Mercosur bloc — comprised of Brazil, Argentina, Paraguay, and Uruguay — secured a historic trade agreement. This trade agreement removes tariffs on approximately 91% of goods traded between the two areas. In doing so, it will produce at least the third largest free-trade zone in the world, after the EU and NAFTA. Collectively, this agreement protects more than 700 million people and accounts for nearly 20% of global GDP. It does hold great economic potential for both sides of the transaction.
The Mercosur bloc — Argentina, Brazil, Paraguay and Uruguay — has a great deal to gain from this agreement. In addition, eliminating current tariffs would bring about $4 billion in savings. These tariffs are some of the highest in the world, going up as high as 35% for auto parts and cars and 28% on dairy. Annex 2 details the implementation plan for these tariff reductions, which will take place over a period of time, with rolling timelines for product categories laid out.
Economic Implications of Tariff Eliminations
The deal’s most immediate effect will be seen in the automotive supply chain. Under the new terms, Mercosur tariffs on car parts will be eliminated linearly over the next decade, providing critical support to European car manufacturers. This relief comes at exactly the right moment for the embattled European automotive sector. In recent years this critical sector has been increasingly put under stress.
In addition to cars, the EU will introduce a new tariff rate quota for beef imports over the next five years. This targeted legislative measure would make EU-Mercosur trade easier and more efficient while guaranteeing European consumers access to high-quality goods produced in Mercosur countries. These transformations promise to create new global opportunities for European automotive brands such as Fiat, Volkswagen and Renault in Latin America. At the moment, they benefit from little to no Chinese competition in that space.
The agreement caters to larger economic forces. With EV demand set to accelerate rapidly around the world, Europe and North America are coming to understand just how strategically important critical raw materials are. The Mercosur countries are key producers of lithium, niobium, tantalum and natural graphite. These materials are key components of lithium batteries that electric vehicles run on. This illustrates just how much trade and technology have converged in today’s economy.
Strategic Importance for Europe
The strategic importance of this deal can’t be downplayed. Europe, to its credit, is making serious moves to diversify its supply chains and break away from China. The collaboration with Mercosur provides an important avenue for ensuring key materials are secured. This agreement continues Europe’s de-risking strategy. It initiates friendly competition among allied countries with the United States for influence in Latin America.
By fostering closer ties with Mercosur, Europe aims to ensure a stable supply of raw materials that are vital for its energy transition and technological advancements. The agreement does more than deepen transatlantic economic ties — it cements Europe’s position as a crucial player in global supply chains.
All Mercosur countries produce vehicles for other nearby Latin American markets. At the same time, they rapidly expand their vehicle imports to satisfy their domestic appetites. The EU’s engagement in this area can help build domestic production capacity. In parallel, it will introduce European standards and European innovations to these markets.
Challenges and Concerns
Even with all the optimism that surrounds this agreement, it is fraught with challenges and concerns. Some stakeholders in Europe are concerned that a flood of new imports from Mercosur could undermine European industries and jobs. While the deal promises economic growth—with an estimated 0.3% increase in GDP for Mercosur over the coming years—there are apprehensions regarding potential adverse effects on smaller businesses unable to compete with larger foreign firms.
Additionally, climate change has become a polarized issue. Opponents are raising the alarm that increasing agricultural exports from Mercosur could increase deforestation. They argue that this would severely undermine environmental safeguards in especially sensitive areas, like the Amazon rainforest. Ultimately, any effort to alleviate these concerns will need to come through sustained conversation and cooperation between the EU and Mercosur countries.