EU-Mercosur Trade Agreement Collapse Will Impact EU Influence

The European Union and the Mercosur countries, comprising Brazil, Uruguay, Paraguay, and Argentina, are abandoning efforts to conclude a free-trade agreement.

The EU-Mercosur Association Agreement goes beyond a standard trade deal. The EU's ability to forge lasting ties with Latin America and its capacity to engage strategically and coherently in external actions that align economic and geopolitical interests is being tested. While the economic impact of failed negotiations is containable, damage to regional alliances and European strategic influence may prove extensive.

Analysis

Limited Economic Impact

The collapse of the EU-Mercosur Association Agreement negotiations will not hamper economic growth in Latin America or Europe. The proposed deal included a removal of tariffs for 90% of EU industrial goods and a cut of 82% of tariffs on Mercosur agricultural products. Under these terms, the EU exports to Mercosur were projected to increase by 9-10% and Mercosur exports to the EU by 3-4%. Despite these tariff reductions, projected growth was modest. The resulting GDP gains for the EU were estimated to be 0.02% while Mercosur's gains were placed between 0.12% and 0.16%. The gains for EU exporters would have amounted to 0.026% of EU GDP, and Mercosur exporters would have seen gains of 0.6% of Mercosur GDP.

This negligible growth stems from limited trade flows between the two regions. The European Union's total exports to Mercosur amounted to $48.6 billion in 2018, constituting just 2% of all external exports and approximately 0.26% of EU's GDP. Mercosur's exports to the EU in the same year reached $43.7 billion, making up 1.8% of Mercosur's GDP. These figures are even lower if a 10% reduction in domestic value added is accounted for. Furthermore, the overall trade flow between the EU and Mercosur has been declining since the late 1990s. In 1997, 32% of extra-Mercosur exports were directed to the EU, but by 2017 this share had decreased to 18% despite the accession of 13 countries to the EU.

A Missed Opportunity for EU Influence

Latin America has traditionally not been a focus for the EU's external policy, especially compared to neighboring North Africa and Southeastern Europe, North America, or, more recently, the Indo-Pacific. Nevertheless, the region has garnered strategic importance: the Russian invasion of Ukraine and the escalating Sino-American geo-economic competition has compelled the EU to seek new partnerships. However, the July 2023 CELAC (Community of Latin American and Caribbean States) Summit underscored a lack of EU influence in Latin American countries, with indecision and a scarcity of leverage leading to stalled discussions on the semantics of the summit's communiqué regarding the condemnation of the Russian invasion.

Not withstanding, the collapse of the agreement negotiations between the EU and Mercosur has significant implications for both regions. For instance, Mercosur members have missed an opportunity to overcome internal disputes. Uruguay's threat to independently negotiate a trade deal with China and Argentina's unstable economy under President Javier Milei threatens the unity of the bloc in its international dealings. Increased industrialization in Brazil adds deeper uncertainty regarding environmental standards.

China's Role

China has capitalized on waning US and EU regional trade influence. Exports to China accounted for 4% of extra-Mercosur exports in 1997, rising to 12% in 2007 and reaching 25% in 2017. The trend established China as the Mercosur countries' primary importer. The EU and US have faced a relative decline in trading volumes with Mercosur countries.

Moreover, capital flows play a crucial role in the Sino-Mercosur relationship. Since 2005, China Development Bank and China Export-Import Bank have provided more than $136 billion in loan commitments to Latin American and Caribbean (LAC) countries and state-owned firms. The top recipients of Chinese loans include Brazil ($31 billion) and Argentina ($17 billion), and the funds are to be used for energy and infrastructure development.

In addition to Chinese state banks, Chinese commercial banks are also active in LAC, having provided dozens of loans to the region since 2012. Once again, Argentina and Brazil are the main beneficiaries, having received 36 and 9 commercial loans respectively. Both state and commercial capital flows are almost entirely channeled into green energy and infrastructure investments, with mining receiving but a minor stake. China's growing market share translates into minimized EU access to raw materials that are vital for its green transition, posing security risks.

A Forgone Opportunity to Project an Anti-Protectionist Stance

The failure of the EU-Mercosur Association Agreement demonstrates the EU's vulnerability to Chinese and American competition. The EU's soft power, based on market liberalization to build geopolitical influence, is deteriorating as Ursula Von Der Leyen's trade legacy failed to materialize. Moreover, the EU risks failing to position itself as the global regulatory leader. Its commitment to serve as a global driver of World Trade Organization+ (WTO+) regulations, such as demanding transparency in the use of trade defense instruments, public consultation, and cooperation mechanisms, risks stirring backlash at home when competing with countries utilizing industry subsidies.

Conclusion

The implications of the collapse of the EU-Mercosur Free Trade Agreement extend beyond the immediate economic arena. The economic consequences are minor and will reflect the currently declining trade flow trend. However, the geopolitical shifts resulting from this missed opportunity will shape international relations, influencing strategic alliances in the years to come.



Alessandra Cassisi is a Master of Arts in European Public Policy candidate at JHU-SAIS. Her main interests focus on pressing issues in the EU in the realm of the economics of immigration, EU energy & climate policy, and international trade law. She obtained her BA in Politics, Philosophy, and Economics from LUISS Guido Carli University with a focus on Political Economy.