Why Europe’s trade deal with South America is so controversial

The European Union blockbuster trade deal with South America’s Mercosur bloc is widely regarded as highly controversial, with EU member states divided over its terms and many wary of another farmer flash point.

After 25 years of talks, the EU and five South American countries (Brazil, Argentina, Uruguay, Paraguay and, recently, Bolivia) signed a brand trade agreement on December 6, laying the foundation for one of the largest free trade zones in the world.

The transatlantic partnership is My dear It covers an area of ​​more than 700 million people and represents around 20% of the world’s gross domestic product.

The deal, which is designed to facilitate trade between the two blocs by reducing tariffs on a range of products, now needs approval from the EU Parliament and a qualified majority of 15 member states.

Analysts expect a bumpy ratification process, and farmers and some EU member states warn it could create unfair competition for European agriculture.

France, the euro zone’s second-largest economy, is vehemently opposedwhile countries such as Poland, Italy, Austria and the Netherlands have expressed reservations.

Germany, which strongly favors a deal, is part of a bloc of 10 other member states calling on European Commission President Ursula von der Leyen to quickly ratify the final terms.

“I think the first thing we need to do is be cautious about the fact that we’ve been here before,” Mariano Machado, principal analyst for the Americas at Verisk Maplecroft, told CNBC via video call.

The EU block and Mercosur initially signed a draft trade agreement in June 2019, only for progress to be delayed until earlier this month amid a litany of political and environmental issues. Some of these headwinds included an expected increase in pesticide use and the prospect of further biodiversity loss, concerns about the rate of deforestation in the amazon and human rights concerns regarding indigenous groups.

Machado said France’s tacit rejection of the deal evolved over the past nearly six years into “proactive attempts to simply throw the deal overboard.”

In that sense, Machado said that the EU’s Von der Leyen had achieved a monumental victory by “breaking through the cracks” of French political turmoil and making it “increasingly difficult” for Paris to oppose the agreement.

“It is much more expensive to undo a piece of paper than an idea,” Machado said, adding that it does not seem likely that France could successfully lead a blocking minority.

A spokesman for France’s Foreign Ministry did not respond to a request for comment.

“The capitals that oppose the agreement are trying to build a coalition that could prevent the council from reaching the necessary qualified majority,” saying Alberto Rizzi, policy fellow at the European Council on Foreign Relations, a think tank.

“Blocking it would mean enormous economic and political damage to the EU at a time when it can barely afford it,” he continued. “European governments cannot fail in this test of unity and strength to appease their opponents, such as European farmers and potential far-right voters.”

Food and agricultural products account for the majority of EU imports from Brazil, Argentina and other Mercosur countries, according to analysts at Dutch bank ING. estimating These items reached a total import value of 23 billion euros ($24.13 billion) in 2023.

In a research note published earlier this month, ING analysts said the deal is expected to facilitate trade growth between the two regions, citing a combination of larger import quotas and lower or eliminated tariffs on products. such as beef, poultry, sugar beets and soybeans.

This is sowing discontent among EU farmers, particularly because their Mercosur counterparts can operate at lower costs.

For example, on December 12, farmers in southwestern France built a wall of 578 bales of hay at a demonstration on the Auch-Toulouse highway, with each bale said to represent French parliamentarians in the 577-seat parliament. country, with an additional one for French President Emmanuel Macron, according to media reports.

The obstruction occurred to protest the EU-Mercosur trade deal, along with other internal issues.

Environmental activists have also sounded the alarm about the potential for increased trade in agricultural products, citing the prospect of an influx of EU food imports in exchange for more EU exports of cars, plastics and pesticides.

“No green annex can fix this inherently bad deal,” said Laura Restrepo Alameda of the Latin American Climate Action Network. saying on December 6.

“It is designed to promote trade in products that cause deforestation, land grabs, massive use of pesticides, carbon emissions and human rights violations,” he added.

Responding to a request for comment from CNBC, EU Commission spokesman Olof Gill said the bloc’s approach to the deal “exemplifies how trade deals can effectively advance global climate efforts, linking economic collaboration with environmental responsibility”.

Gill cited the incorporation of the latest business and sustainability standards and the inclusion of the milestone Paris Agreement as an “essential element” of the agreement.

“This will allow the EU to suspend the agreement if the standards of the Paris Agreement are not respected, reinforcing the role of trade agreements in supporting climate goals,” Gill told CNBC by email.

Analysts told CNBC earlier this month that lithium’s strategic importance probably played an important role in the trade agreement, while a reduction in car rates It has also been touted as a much-needed boost to Europe’s economy. automobile industry in crisis.

Lithium, sometimes referred to as “white gold“due to its light color and high market value, it is considered as a critical component in the global shift away from fossil fuels.

Mercosur countries such as Argentina, Bolivia and Brazil hold large reserves of lithium, at a time when EU demand for this critical raw material is expected to increase substantially.

Elizabeth Johnson, head of Brazil research at economic consultancy TS Lombard, said Brazil is likely to be one of the biggest winners from the deal.

“The country already accounts for approximately 80% of all Mercosur exports to the EU and the bloc is currently Brazil’s second largest trading partner,” Johnson said in a research note published on December 11.

“Brazilian politicians hope that the agreement will help expand Brazil’s export base to include new products and reinforce European investment in Brazil, particularly in the energy transition segment,” he added.